** **

**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

# **FORM 10-Q**

 
| **(Mark  One)**                                                                                                                                                   | ** ** | ** **                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                              |       |                                                                                          |
| **ý**                                                                                                                                                        | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|                                                                                                                                                              |       |                                                                                          |
| **For the quarterly period ended  March 31, 2006 or**                                                                                                             |
|                                                                                                                                                              |       |                                                                                          |
| **o**                                                                                                                                                             | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                              |       |                                                                                          |
| **For the transition period from             to            ** |
|                                                                                                                                                              |       |                                                                                          |
| **Commission file number: 000-30575**                                                                                                                             |

 

**AVOCENT CORPORATION**

(Exact Name of Registrantas Specified in Its Charter)

 

| **Delaware**                                                    | ** ** | **91-2032368**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer  Identification Number) |
|                                                            |       |                                     |
| **4991  Corporate Drive  Huntsville, Alabama**                  | ** ** | **35805**                                |
| (Address of Principal  Executive Offices)                       |       | (Zip Code)                               |

 

**256-430-4000**

(Registrant’s TelephoneNumber, Including Area Code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended, during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2)has been subject to such filing requirements for the past 90 days.

 

ýYes  oNo

 

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. (See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.)

 
| Large Accelerated Filer ý |   | Accelerated Filer o |   | Non-Accelerated Filer o |
|--------------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.):

Yes o     No ý

 

As of May 3, 2006, the number ofoutstanding shares of the Registrant’s Common Stock was 48,978,965.

 

 

----

 

**AVOCENT CORPORATION**

**FORM 10-Q**

**March 31, 2006**

 

**INDEX**

 
|      |                  |
|-----------|-----------------------|
| Part I    | Financial Information |   |
|      |                  |   |
|      | Item 1.               | Financial Statements (unaudited) |   |
|      |                  |   |   |
|      |                  | Consolidated  Statements of Income for the Three Months Ended March 31, 2006 and  April 1, 2005 |   |
|      |                  |   |   |
|      |                  | Consolidated Balance Sheets at March  31, 2006 and December 31, 2005 |   |
|      |                  |   |   |
|      |                  | Condensed Consolidated  Statements of Cash Flows for the Three Months Ended March 31,  2006 and April 1, 2005 |   |
|      |                  |   |   |
|      |                  | Notes to Condensed  Consolidated Financial Statements |   |
|      |                  |   |   |
|      | Item 2.               | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|      |                  |   |   |
|      | Item 3.               | Quantitative and Qualitative  Disclosures about Market Risks |   |
|      |                  |   |   |
|      | Item 4.               | Controls and Procedures |   |
|      |                  |   |   |
| Part II   | Other Information     |   |
|      |                  |   |
|      | Item 1.               | Legal Proceedings |   |
|      |                  |   |   |
|      | Item 1A.              | Risk Factors |   |
|      |                  |   |   |
|      | Item 2.               | Unregistered Sales  of Equity Securities and Use of Proceeds |   |
|      |                  |   |   |
|      | Item 6.               | Exhibits |   |
|      |                  |
| Signature |                  |

 

2

----

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**AVOCENT CORPORATION**

**CONSOLIDATEDSTATEMENTS OF INCOME**

(Unaudited, in thousands,except per share data)

 
| ** **                                                     | ** **   | **For the three months ended** | ** **   |
|----------------------------------------------------------------|--------------|----------------------------------------------------|--------------|
| ** **                                                     | ** **   | **March 31,**                                 | ** **   | **April 1,** | ** ** |
| ** **                                                     | ** **   | **2006**                                           | ** **   | **2005** | ** ** |
| *** ***                                                   | *** *** | *** ***                                       | *** *** | *** *** | *** *** |
| Net sales                                                      |         | $                                                  | 94,512       |   | $ | 76,805 |   |
| Cost of sales                                                  |         | 38,555                                             |         | 33,223 |   |
| Gross profit                                                   |         | 55,957                                             |         | 43,582 |   |
|                                                           |         |                                               |         |   |   |
| Research and  development expenses                             |         | 13,209                                             |         | 14,467 |   |
| Acquired  in-process research and development expense          |         | 2,100                                              |         | — |   |
| Selling, general  and administrative expenses                  |         | 23,384                                             |         | 22,280 |   |
| Amortization of  intangible assets                             |         | 2,351                                              |         | 6,622 |   |
| Total operating  expenses                                      |         | 41,044                                             |         | 43,369 |   |
|                                                           |         |                                               |         |   |   |
| Income from  operations                                        |         | 14,913                                             |         | 213 |   |
|                                                           |         |                                               |         |   |   |
| Net investment  income                                         |         | 3,091                                              |         | 2,056 |   |
| Net realized  investment losses                                |         | (55                                                | )            | (177 | ) |
| Other income  (expense), net                                   |         | (20                                                | )            | 61 |   |
|                                                           |         |                                               |         |   |   |
| Income before  provision for income taxes                      |         | 17,929                                             |         | 2,153 |   |
| Provision for  income taxes                                    |         | 4,996                                              |         | 319 |   |
|                                                           |         |                                               |         |   |   |
| Net income (1)                                                 |         | $                                                  | 12,933       |   | $ | 1,834 |   |
|                                                           |         |                                               |         |   |   |
| Earnings per  share:                                           |         |                                               |         |   |   |
| Basic                                                          |         | $                                                  | 0.26         |   | $ | 0.04 |   |
|                                                           |         |                                               |         |   |   |
| Diluted                                                        |         | $                                                  | 0.26         |   | $ | 0.04 |   |
|                                                           |         |                                               |         |   |   |
| Weighted average  shares used in computing earnings per share: |         |                                               |         |   |   |
| Basic                                                          |         | 49,095                                             |         | 50,208 |   |
|                                                           |         |                                               |         |   |   |
| Diluted                                                        |         | 50,109                                             |         | 51,452 |   |

 

----

(1) Net income for the three month periodended March 31, 2006 included stock-based compensation expense underStatement of Financial Accounting Standards No. 123R of $580, net of tax,related to employee stock options. Net income for the three month period endingApril 1, 2005 included stock-based compensation expense of $509, net of tax,related to the amortization of deferred compensation recorded as aresult of assumed options from the acquisition of OSA Technologies Inc. See Note 13to the Condensed Consolidated Financial Statements for more information.

 

See notes accompanyingthese condensed consolidated financial statements.

 

3

----

 

**AVOCENT CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

(Unaudited, in thousands,except per share data)

 
| ** **                                                                                                                                                                                            | ** **   | **March 31,** | ** ** | **December 31,** | ** **   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------|------------|-----------------------|--------------|
| ** **                                                                                                                                                                                            | ** **   | **2006**           | ** ** | **2005**              | ** **   |
| *** ***                                                                                                                                                                                          | *** *** | ** **         | ** ** | ** **            | *** *** |
| **ASSETS**                                                                                                                                                                                            |         |               |       |                  |         |
| Current assets:                                                                                                                                                                                       |         |               |       |                  |         |
| Cash and cash  equivalents                                                                                                                                                                            |         | $                  | 88,384     |                  | $            | 66,425 |   |
| Investments  maturing within one year                                                                                                                                                                 |         | 136,767            |       | 227,478               |         |
| Accounts  receivable, net                                                                                                                                                                             |         | 71,445             |       | 68,712                |         |
| Inventories, net                                                                                                                                                                                      |         | 30,289             |       | 21,178                |         |
| Other current  assets                                                                                                                                                                                 |         | 12,446             |       | 10,524                |         |
| Deferred tax  assets, net                                                                                                                                                                             |         | 5,245              |       | 4,054                 |         |
| Total current  assets                                                                                                                                                                                 |         | 344,576            |       | 398,371               |         |
| Investments                                                                                                                                                                                           |         | 58,714             |       | 51,939                |         |
| Property and  equipment, net                                                                                                                                                                          |         | 38,722             |       | 36,801                |         |
| Goodwill                                                                                                                                                                                              |         | 331,914            |       | 269,992               |         |
| Other intangible  assets, net                                                                                                                                                                         |         | 55,108             |       | 15,763                |         |
| Other assets                                                                                                                                                                                          |         | 861                |       | 885                   |         |
| Total assets                                                                                                                                                                                          |         | $                  | 829,895    |                  | $            | 773,751 |   |
|                                                                                                                                                                                                  |         |               |       |                  |         |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                        |         |               |       |                  |         |
| Current  liabilities:                                                                                                                                                                                 |         |               |       |                  |         |
| Accounts payable                                                                                                                                                                                      |         | $                  | 19,126     |                  | $            | 13,069 |   |
| Accrued wages  and commissions                                                                                                                                                                        |         | 7,899              |       | 10,500                |         |
| Accrued liabilities                                                                                                                                                                                   |         | 24,440             |       | 17,206                |         |
| Payable to  former  Cylcades shareholders (*see Note 8*)                                                                                                                                         |         | 17,135             |       | —                |         |
| Income taxes  payable                                                                                                                                                                                 |         | 10,934             |       | 11,270                |         |
| Other current  liabilities                                                                                                                                                                            |         | 3,467              |       | 1,702                 |         |
| Total current  liabilities                                                                                                                                                                            |         | 83,001             |       | 53,747                |         |
|                                                                                                                                                                                                  |         |               |       |                  |         |
| Deferred tax  liabilities, net                                                                                                                                                                        |         | 16,995             |       | 2,564                 |         |
| Other  non-current liabilities                                                                                                                                                                        |         | 4,779              |       | 2,118                 |         |
| Total  liabilities                                                                                                                                                                                    |         | 104,775            |       | 58,429                |         |
|                                                                                                                                                                                                  |         |               |       |                  |         |
| Commitments and  contingencies                                                                                                                                                                        |         |               |       |                  |         |
|                                                                                                                                                                                                  |         |               |       |                  |         |
| Stockholders’  equity:                                                                                                                                                                           |         |               |       |                  |         |
| Preferred stock,  $0.001 par value; 5,000 shares   authorized, no shares issued and outstanding as of March 31, 2006 and  December 31, 2005, respectively                                        |         | —             |       | —                |         |
| Common stock,  $0.001 par value; 200,000 shares authorized, March 31, 2006 – 52,527 shares  issued and 48,927 outstanding; December 31, 2005 – 51,612 shares issued and  48,837 outstanding |         | 53                 |       | 52                    |         |
| Additional  paid-in capital                                                                                                                                                                           |         | 1,128,632          |       | 1,104,899             |         |
| Accumulated  other comprehensive loss                                                                                                                                                                 |         | (414               | )          | (497                  | )            |
| Accumulated  deficit                                                                                                                                                                                  |         | (294,570           | )          | (307,503              | )            |
| Treasury stock,  at cost; March 31, 2006 – 3,600 shares; December 31, 2005 – 2,775 shares                                                                                                   |         | (108,581           | )          | (81,629               | )            |
| Total  stockholders’ equity                                                                                                                                                                      |         | 725,120            |       | 715,322               |         |
| Total  liabilities and stockholders’ equity                                                                                                                                                      |         | $                  | 829,895    |                  | $            | 773,751 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

4

----

** **

**AVOCENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, in thousands)

 

 
| ** **                                                                         | ** **   | **For the three months ended** | ** ** |
|------------------------------------------------------------------------------------|--------------|----------------------------------------------------|------------|
| ** **                                                                         | ** **   | **March 31,**                                 | ** ** | **April 1,** | ** ** |
| ** **                                                                         | ** **   | **2006**                                           | ** ** | **2005** | ** ** |
| *** ***                                                                       | *** *** | ** **                                         | ** ** | ** ** | *** *** |
| Cash flows from  operating activities:                                             | * *     | * *                                           | * *   | * * | * * |
| Net income                                                                         |         | $                                                  | 12,933     |   | $ | 1,834 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |         |                                               |       |   |   |
| Depreciation                                                                       |         | 1,774                                              |       | 1,576 |   |
| Amortization of  intangible assets                                                 |         | 2,351                                              |       | 6,622 |   |
| Stock-based  compensation                                                          |         | 841                                                |       | 509 |   |
| Acquired  in-process research and development expenses                             |         | 2,100                                              |       | — |   |
| Amortization of  premiums on investments                                           |         | 16                                                 |       | 431 |   |
| Net loss on  sales of investments                                                  |         | 55                                                 |       | 177 |   |
| Income tax  benefit from exercise of stock options (see Note 13)                   |         | —                                             |       | 1,904 |   |
| Excess tax benefit from stock-based  compensation (see Note 13)                    |         | (3,695                                             | )          | — |   |
| Changes in  operating assets and liabilities (net of effects of acquisition):      |         |                                               |       |   |   |
| Accounts  receivable, net                                                          |         | 6,568                                              |       | 10,912 |   |
| Inventories, net                                                                   |         | (1,855                                             | )          | (3,084 | ) |
| Other assets                                                                       |         | 391                                                |       | (1,860 | ) |
| Accounts payable                                                                   |         | (1,466                                             | )          | (2,504 | ) |
| Accrued wages and  commissions                                                     |         | (2,219                                             | )          | (3,661 | ) |
| Accrued  liabilities (2)                                                           |         | (1,991                                             | )          | (287 | ) |
| Income taxes,  current and deferred                                                |         | 761                                                |       | (2,415 | ) |
| Net cash  provided by operating activities                                         | ** **   | 16,564                                             | ** ** | 10,154 | ** ** |
| ** **                                                                         | ** **   | ** **                                         | ** ** | ** ** | ** ** |
| Cash flows from  investing activities:                                             |         |                                               |       |   |   |
| Purchase of Cyclades,  net of cash received  (1)                              |         | (72,751                                            | )          | — |   |
| Purchases of  property and equipment (2)                                           |         | (1,689                                             | )          | (1,008 | ) |
| Purchases of  investments                                                          |         | (89,928                                            | )          | (67,898 | ) |
| Maturities and  proceeds from sales of investments                                 |         | 173,805                                            |       | 75,663 |   |
| Net cash  provided by investing activities                                         |         | 9,437                                              |       | 6,757 |   |
| ** **                                                                         | ** **   | ** **                                         | ** ** | ** ** | ** ** |
| Cash flows from  financing activities:                                             | ** **   | ** **                                         | ** ** | ** ** | ** ** |
| Proceeds from  employee stock option exercises                                     |         | 19,198                                             |       | 5,956 |   |
| Excess tax benefit from stock-based  compensation (see Note 13)                    |         | 3,695                                              |       | — |   |
| Proceeds from  employee stock purchase plan                                        |         | —                                             |       | 2,107 |   |
| Purchases of  treasury stock                                                       |         | (26,952                                            | )          | (21,862 | ) |
| Net cash used in  financing activities                                             |         | (4,059                                             | )          | (13,799 | ) |
|                                                                               |         |                                               |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |         | 17                                                 |       | (50 | ) |
|                                                                               |         |                                               |       |   |   |
| Net increase in  cash and cash equivalents                                         |         | 21,959                                             |       | 3,062 |   |
| Cash and cash  equivalents at beginning of period                                  |         | 66,425                                             |       | 44,724 |   |
| Cash and cash  equivalents at end of period                                        |         | $                                                  | 88,384     |   | $ | 47,786 |   |

 

----

(1) – $17,135 of the purchase consideration for Cyclades was not yetpaid at March 31, 2006. These funds were distributed in April 2006.

 

(2) – $6,250 included in accrued liabilities related to the purchase ofcertain tangible and intangible assets of an existing product-line.

 

See notes accompanyingthese condensed consolidated financial statements.

 

5

----

 

**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited, in thousands,except per share data)

 

Note 1.   Basisof Presentation

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inconformity with generally accepted accounting principles and reflect alladjustments consisting of normal recurring adjustments which, in the opinion ofmanagement, are necessary for a fair presentation of the results for theperiods shown. The results of operations for these periods are not necessarilyindicative of the results expected for the full fiscal year or for any futureperiods. The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates andassumptions.

 

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the relatednotes contained in our Annual Report on Form 10-K for the year ended December31, 2005, which is on file with the Securities and Exchange Commission and isavailable at our website, www.avocent.com. The balance sheet presented in theaccompanying financial statements for December 31, 2005, was derived from theaudited financial statements filed in our 10-K for the period ended December31, 2005, but does not include all disclosures required by accountingprinciples generally accepted in the United States of America.

 

We report ourannual results based on years ending December 31. We report our quarterlyresults for the first three interim periods based on 13 week periods ending onFridays and for the fourth interim period ending on December 31.

 

Our financialstatements are consolidated and include the accounts of Avocent Corporation andour wholly owned subsidiaries. All significant inter-company transactions andbalances have been eliminated in consolidation.

 

Note 2.   Inventories

 

Inventories consisted ofthe following at:

 
| ** **       | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **       | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Raw materials    |       | $                            | 5,870      |                            | $          | 3,625 |   |
| Work-in-process  |       | 2,191                        |       | 173                             |       |
| Finished goods   |       | 22,228                       |       | 17,380                          |       |
| Inventories, net |       | $                            | 30,289     |                            | $          | 21,178 |   |

 

Inventoriesas of March 31, 2006 include $6,827, of inventory received in the acquisitionof Cyclades. Inventories above have been reduced by reserves for excess andobsolete inventories of $4,376 and $4,558 as of March 31, 2006 and December 31,2005, respectively.

 

Note 3.   Stock Options andTreasury Stock

 

Stock option exercises —Shares of our common stock issued as a result of option exercises totaled 915shares during the quarter ended March 31, 2006 and 314 shares during thequarter ended April 1, 2005. Total proceeds received from these optionexercises were $19,198 for the quarter ended March 31, 2006 and $5,956 for thequarter ended April 1, 2005. Additionally, common stock issued under ourEmployee Stock Purchase Plan totaled 87 shares during the quarter ended April1, 2005. Total proceeds received from the shares issued under the ESPP were$2,107 for the quarter ended April 1, 2005. There were no shares issued underthe ESPP for the quarter ended March 31, 2006 following the suspension of theESPP by our Board of Directors in 2005.

 

Stock repurchases — Werepurchased 825 shares of our common stock during the quarter ended March31,2006 at a cost totaling $26,952. We repurchased 700 shares of our commonstock during the quarter ended April 1, 2005 at a cost totaling $21,862. Thesetreasury shares were purchased on the open market through various brokers underthe stock re-purchase plan approved by our Board of Directors.

 

6

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Note 4.   Accumulated OtherComprehensive Income (Loss)

 

We record unrealized gains and losseson our foreign currency translation adjustments and unrealized holding gains orlosses on our available-for-sale securities, net of tax, as accumulated othercomprehensive income (loss), which is included as a separate component ofstockholders’ equity. Comprehensive income in the first quarter of 2006 of$13,016 consists of $12,933 of net income, $8 of unrealized gains oninvestments (net of deferred income taxes) and $75 of foreign currencytranslation adjustments. Comprehensive income in the first quarter of 2005 of$1,083 consists of $1,834 of net income, $513 of unrealized losses oninvestments (net of deferred income taxes) and $238 of foreign currencytranslation adjustments. As of March 31, 2006 and December 31, 2005, totalaccumulated other comprehensive income (loss) was $(414) and $(497),respectively.

 

Note 5.   Earnings Per Share

 
| ** **                                                           | ** ** | **Income (Numerator)** | ** ** | **Shares   (Denominator)** | ** ** | **Per-Share   Amount** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                                           | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **                  | ** ** |
| **For the three months ended  March 31, 2006**                       |       |                        |       |                            |       |                        |       |
| **Basic EPS**                                                        |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders                          |       | $                           | 12,933     |                            | 49,095     |                        | $          | 0.26 |   |
| **Effect of Dilutive Securities**                                    |       |                        |       |                            |       |                        |       |
| Stock options                                                        |       | —                      |       | 1,014                           |       | —                      |       |
| **Diluted EPS**                                                      |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders and  assumed conversions |       | $                           | 12,933     |                            | 50,109     |                        | $          | 0.26 |   |
|                                                                 |       |                        | ** ** |                            | ** ** |                        | ** ** |
| **For the three months ended  April 1, 2005**                        |       |                        |       |                            |       |                        |       |
| **Basic EPS**                                                        |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders                          |       | $                           | 1,834      |                            | 50,208     |                        | $          | 0.04 |   |
| **Effect of Dilutive Securities**                                    |       |                        |       |                            |       |                        |       |
| Stock options                                                        |       | —                      |       | 1,244                           |       | —                      |       |
| **Diluted EPS**                                                      |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders and  assumed conversions |       | $                           | 1,834      |                            | 51,452     |                        | $          | 0.04 |   |

 

Note 6.   Segment Reporting

 

In prior years, wereported our operations as a single reportable segment. However, in the firstquarter of 2006, we reorganized our business into five divisions:

•      The Management Systems Division, whichincludes our branded and OEM KVM, serial console, power control and managementappliance businesses;

•      The Embedded Software and Solutions Division,which focuses on developing and marketing embedded systems and softwareincluding IPMI and embedded KVM technologies primarily for our OEM customers;

•      The Connectivity and Control Division,which focuses on expanding the markets for Avocent’s serial and wirelessproducts;

•      The Desktop Solutions Division, which willfocus on developing new products to facilitate client blade deployments; and

•      The Mobile Technologies Division, whichincludes mobile device management and secure wireless systems administration.

 

7

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The reorganizationincluded reconfiguring our systems and defining new cost centers and operatingmeasures to track performance of the divisions and to use as a basis for ourchief operating decision maker to manage and allocate resources. As a result ofthis change in reportable segments, we have restated the segment informationpreviously disclosed for the quarter ended April 1, 2005 to conform to thecurrent segment disclosures.

 

We evaluate theperformance of our segments based on revenue and operating profit, which iscalculated before corporate and unallocated costs, amortization of intangibles,acquired in-process research and development expense, and stock compensationcosts. We do not track or use assets by segment as a measure of performance and,therefore, we have not presented assets by segment.

** **
| ** **                       | ** ** | **For the three months ended** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|
| ** **                       | ** ** | **March 31, 2006**                       | ** ** | **April 1, 2005** | ** ** |
| Net revenue:                     | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Management  Systems              |       | $                                                  | 84,365     |   | $ | 69,840 |   |
| Embedded Software  and Solutions |       | 6,133                                              |       | 3,780 |   |
| Other business units             |       | 3,021                                              |       | 3,185 |   |
| Corporate and  unallocated       |       | 993                                                |       | — |   |
| Total net  revenue               |       | $                                                  | 94,512     |   | $ | 76,805 |   |

 
| ** **                                             | ** ** | **For the three months ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                             | ** ** | **March 31, 2006**                       | ** ** | **April 1, 2005** | ** ** |
| Operating income  (loss):                              | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Management  Systems                                    |       | $                                                  | 24,734     |   | $ | 14,377 |   |
| Embedded  Software and Solutions                       |       | 1,536                                              |       | (565 | ) |
| Other business units                                   |       | (3,714                                             | )          | (3,331 | ) |
| Corporate and unallocated  costs                       |       | (2,200                                             | )          | (2,979 | ) |
| Amortization of  intangibles and other expenses        |       | (2,502                                             | )          | (6,780 | ) |
| Acquired  in-process research and development expenses |       | (2,100                                             | )          | — |   |
| Stock-based compensation  expense                      |       | (841                                               | )          | (509 | ) |
| Total operating  income                                |       | 14,913                                             |       | 213 |   |
|                                                   |       |                                               |       |   |   |
| Other income                                           |       | 3,016                                              |       | 1,940 |   |
| Income before  provision for income taxes              |       | $                                                  | 17,929     |   | $ | 2,153 |   |

 

Revenue and operatingincome for our Management Systems division includes the operating results ofCyclades from the date of the acquisition (*see Note 8*).

 

We sell our productsinternationally to customers in several countries. No foreign country accountedfor more than 10% of sales in the first quarter of 2006. Sales to customers inthe Netherlands, including the European distribution facility for one of ourOEM customers, accounted for 11% of sales in the first quarter of 2005. Noother country accounted for more than 10% of sales in the first quarter of2005.

 

**As of March 31, 2006, long-lived assetstotaled $425,744, which includes $408,798 held in the U.S. and $16,947 heldoutside of the U.S. As of December 31, 2005, long-lived assets totaled $322,556,which includes $305,286 held in the U.S. and $17,270 held outside of the U.S.**

 

8

----

 

**Note 7.   ForwardContracts**

** **

We use forward contracts to reduce our foreigncurrency exposure related to the net cash flows from our internationaloperations. The majority of these contracts are short-term contracts (threemonths or less) and are marked-to-market each quarter and included in tradepayables, with the offsetting gain or loss included in other income (expense)in the accompanying consolidated statements of income. As of March 31, 2006,and December 31, 2005, we had one open forward contract with an approximatefair value of zero.

 

**Note 8.   Acquisitionof Cyclades Corporation**

** **

OnMarch 30, 2006, we acquired Cyclades Corporation, a privately-held companybased in Fremont, California, with operations in Sao Paulo, Brazil and Munich,Germany.  Cyclades employs approximately 325 people in 19 locations aroundthe world. The Cyclades product lines include serial, KVM and power managementproducts. The acquisition of Cyclades will enhance our position in the Linuxserver and networking infrastructure management market and providescomplementary products to our product lines allowing us to provide ourcustomers a more integrated platform for managing their IT infrastructure. Theresults of Cyclades’ operations have been included in the consolidatedfinancial statements since the date of acquisition.

 

The acquisitionwas recorded under the purchase method of accounting, and the purchase pricewas allocated based on the fair value of the assets acquired and liabilitiesassumed. In accordance with generally accepted accounting principles, purchasedresearch and development costs allocated to patented and patent-pendingtechnology were capitalized and will be amortized over the respective estimateduseful lives. The remaining amounts of purchased research and development wereexpensed upon the closing of the transaction. The goodwill recorded as a resultof the acquisition will not be amortized but will be included in our annualreview of goodwill for impairment. Additionally, amortization of the otherintangible assets acquired and the goodwill recorded is not tax deductible. Asummary of the total purchase consideration, excluding cash received, is asfollows:

 
| Cash paid for  outstanding shares  |   | $      | 90,000 |   |
|------------------------------------|--------|--------|--------|--------|
| Acquisition  costs paid by Avocent |   | 2,294  |   |
|                               |   |   |   |
| Total purchase  consideration      |   | $      | 92,294 |   |

 

We funded theacquisition through available cash. On the closing of the Cyclades transaction,we acquired $2,408 in cash held by Cyclades.

 

The purchase consideration was allocated, on apreliminary basis, to the estimated fair values of the assets acquired andliabilities assumed, as follows:

 
| ** **                           | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | ** **                      | ** ** | ** **               | ** ** |
| Tangible assets                      |       | $                               | 23,995     |                     | —     |   |
| In-process  research and development |       | 2,100                           |       | —                   |       |
| Developed  technology                |       | 16,500                          |       | 5 years                  |       |
| Customer base                        |       | 12,100                          |       | 5 years                  |       |
| Trademarks                           |       | 3,100                           |       | 5 years                  |       |
| Non-compete  agreements              |       | 4,000                           |       | 3 years                  |       |
| Goodwill                             |       | 61,741                          |       | —                   |       |
| Deferred taxes                       |       | (13,852                         | )          | —                   |       |
| Assumed  liabilities                 |       | (17,390                         | )          | —                   |       |
|                                 |       |                            |       |                     |       |
|                                 |       | $                               | 92,294     |                     |       |   |

 

9

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As of March 31, 2006,$17,135 of the purchase consideration for Cyclades was not yet paid to certainemployee shareholders and was included in cash and as a liability due toCyclades shareholders. These funds were distributed in April 2006. An escrowaccount with $15,000 of the consideration for indemnifiable events specified inthe acquisition agreements will be open for 21 months.

 

The $2,100 in fair value of all of the in-processresearch and development (“IPR&D”) received in the acquisition wasdetermined using a form of the discounted cash flow method known as themulti-period excess earnings method. These amounts were deemed to be forparticular research and development projects that have no alternative futureuses and were therefore expensed rather than capitalized at the time ofpurchase.

 

Cyclades in-process research and developmentactivities consisted of the development of its KVM/net 3.0 product line and itsPM 45 product lines. KVM/Net 3.0 is thenext generation KVM over IP technology that leverages DSP processing technologyand software-based compression algorithms. PM45 is an intelligent powerdistribution unit that provides high current on a 3-phase main power source. Itis anticipated that the products will be completed during late 2006. Theseprojects were still in process at the end of the first quarter 2006.

 

The new generations of products under development areprojected to sell through sales channels and to customers that aresubstantially the same as current and historical sales channels and customers. Pricingand margins will not differ significantly from historical pricing and margins. Revenuefor the projects under development was projected through 2015. Net incomeattributable to IPR&D was calculated by applying Cyclades projected gross,operating and net profit margins to IPR&D revenue, while consideringAvocent’s historical results and industry prospects. These products haveestimated economic lives of up to 10 years. The discount rate used to valueIPR&D was 28%.

 

**Pro Forma Financial Information -**The following unaudited pro forma summary combines theresults of operations of Avocent and Cyclades as if the acquisitions hadoccurred at the beginning of each period presented. Certain adjustments havebeen made to reflect the impact of the purchase transactions. These pro formaresults have been prepared for comparative purposes only and do not purport tobe indicative of what would have occurred had the acquisitions been made at thebeginning of 2005, or of results which may occur in the future.

 
| ** **                | ** ** | **Three Months Ended,** | ** ** |
|---------------------------|------------|-----------------------------------|------------|
| ** **                | ** ** | **March 31, 2006**      | ** ** | **April 1, 2005** | ** ** |
|                      |       |                              |       |   |   |
| Net sales                 |       | $                                 | 108,539    |   | $ | 90,058 |   |
| Net income                |       | $                                 | 14,478     |   | $ | 2,203 |   |
| Income per basic  share   |       | $                                 | 0.29       |   | $ | 0.04 |   |
| Income per  diluted share |       | $                                 | 0.29       |   | $ | 0.04 |   |

** **

**The above amounts exclude acquiredin-process research and development expense of $2,100 related to the Cycladesacquisition.**

 

10

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**Note 9.   Goodwill andOther Intangible Assets**

** **

**Other intangible assets subject toamortization were as follows:**

** **
| ** **                        | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Gross **              | ** ** | **Accumulated **           | ** ** | **Gross ** | ** ** | **Accumulated** | ** ** |
| ** **                        | ** ** | **Carrying  Amounts**        | ** ** | **Amortization**                | ** ** | **Carrying  Amounts** | ** ** | ** Amortization** | ** ** |
|                              |       |                         |       |                            |       |   |   |   |   |
| Developed  technology             |       | $                            | 31,320     |                            | $          | 9,481 |   | $ | 14,820 |   | $ | 8,293 |   |
| Patents and  trademarks           |       | 12,462                       |       | 5,379                           |       | 9,174 |   | 4,959 |   |
| Customer base  and certifications |       | 22,809                       |       | 2,136                           |       | 4,870 |   | 1,719 |   |
| Non-compete  agreements           |       | 6,520                        |       | 1,485                           |       | 2,520 |   | 1,289 |   |
| Other                             |       | 1,814                        |       | 1,336                           |       | 1,814 |   | 1,175 |   |
|                              |       | $                            | 74,925     |                            | $          | 19,817 |   | $ | 33,198 |   | $ | 17,435 |   |

** **

DuringMarch 2006, we acquired an existing product line from a third party forapproximately $6,250. We recorded approximately $5,839 in other intangibleassets related to this transaction, which is subject to future amortization.

** **

**For the three months ended March 31,2006 and April 1, 2005, amortization expense for other intangible assets was$2,351 and $6,622, respectively. The approximate estimated annual amortizationfor other intangibles is as follows:**

** **
| **Years ending December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2006                                         |       | $          | 14,413     |   |
| 2007                                         |       | $          | 13,519     |   |
| 2008                                         |       | $          | 11,519     |   |
| 2009                                         |       | $          | 7,571      |   |
| 2010                                         |       | $          | 6,340      |   |
| Thereafter                                   |       | $          | 1,746      |   |

** **

**For the three months ended March 31,2006, we recorded $61,741 of goodwill related to the Cyclades Corporationacquisition and $181 of additional goodwill related to a prior acquisition. Forthe three months ended April 1, 2005, we recorded $109 of additional goodwillrelated to the Crystal Link Technologies acquisition.**

** **

**Note10. Product Warranties**

** **

The activity within the liability for warranty returnsfor the quarter ended March 31, 2006:

 
| ** **                                                | ** ** | **2006** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|
|                                                      |       |     |       |
| Balance, January  1, 2006                                 |       | $        | 2,536      |   |
|                                                      |       |     |       |
| Accruals for  product warranties issued during the period |       | 19       |       |
|                                                      |       |     |       |
| Assumed on  acquisition of Cyclades                       |       | 180      |       |
|                                                      |       |     |       |
| Settlements made  during the period                       |       | (117     | )          |
|                                                      |       |     |       |
| Balance, March  31, 2006                                  |       | $        | 2,618      |   |

 

Deferred revenue relatedto our extended warranty program was $2,071 as of March 31, 2006. We recordedearned revenue from the amortization of deferred revenue related to extendedwarranties of $261 for the three months ended March 31, 2006. In addition, werecorded deferred revenue for new extended warranties of $410 during the threemonths ended March 31, 2006.

 

Note 11. Effective Tax Rate

 

The effective tax rate inthe first quarter of 2006 was approximately 27.9% compared to an effective taxrate of approximately 14.8% in the first quarter of 2005.  The provisionfor income taxes was approximately $4,996 for the first quarter of 2006,compared to $319 in the first quarter of 2005. The increase in provision forincome taxes was partly the result of the

 

11

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change in mix of our pre-tax profit among our U.S. andinternational companies.  Additionally, the Irish statutory tax rate onmanufactured goods increased from 10% to 12.5% on January 1, 2006. The U.S.Research and Development credit also has expired, and as of March 31, 2006, thiscredit has not yet been reinstated by Congress. Finally, the Cyclades purchaseincluded In-process Research and Development which was immediately expensedupon the purchase. This item has no tax basis and, therefore, increased theeffective tax rate for the quarter. These increases were slightly offset byincreased investment in tax-free municipal bonds at a higher return as comparedto the first quarter of 2005.

 

Note 12. Legal Proceedings

 

InOctober 2003, Avocent filed a complaint for patent infringement in the UnitedStates District Court for the Northern District of Alabama against ClearCubeTechnology, Inc. The ClearCube complaint seeks injunctive relief, damages,attorneys’ fees, and costs under two of the Companies patents. ClearCube hasfiled counterclaims alleging non-infringement, unenforceability, invalidity,and misuse of the Avocent patents. A Markman hearing on claimsconstruction was held in February 2006, and a trial has been scheduled for July2006.

 

On March 14, 2006, TFSElectronic Manufacturing Services, Inc. filed a Third-Party Complaint and anObjection to Claim of Avocent Corporation with the United States BankruptcyCourt, District of Arizona. As a result of the complaint,an adversary proceeding has been commenced against Avocent in the TFSbankruptcy case in an effort to disallow Avocent’s claim in its entirety. TFSalso seeks damages in an undetermined amount for Avocent’s alleged breach ofcontract, negligence, negligent misrepresentations, breaches of warranty,unjust enrichment, disparagement of TFS’ business, and quantum merit. TFS isseeking recovery of actual damages, punitive damages, attorneys’ fees, pre- andpost-judgment interest, costs, and the imposition of joint and severalliability as to Avocent and a named co-defendant, TopSearch Printed Circuits(HK), Ltd. Avocent has moved to dismiss all claims.

 

**Note 13. Stock Based Compensation**

** **

On January 1, 2006, we adopted SFAS 123(revised 2004), *Share-Based Payment*,(“SFAS 123R”) , which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees and directors,including grants of employee stock options, based on estimated fair values.SFAS 123R supersedes SFAS No. 123 *Accountingfor Stock Based Compensation*  and Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued toEmployees*(“APB No. 25”), which we previously applied, forperiods beginning before fiscal 2006. In March 2005, the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB107”) relating to SFAS 123R. We have applied the provisions of SAB 107 in ouradoption of SFAS 123R.

 

We adopted SFAS 123R using the modifiedprospective transition method, which requires the application of the accountingstandard as of January 1, 2006, the first day of our fiscal 2006 year. Ourconsolidated statements of income for the three months ended March 31,2006 reflect the impact of SFAS 123R. In accordance with the modifiedprospective transition method, our consolidated statements of income for priorperiods have not been restated to reflect the impact of SFAS 123R. New awardsare valued and accounted for prospectively upon adoption. Prior outstandingstock option awards that were not fully vested as of January 1, 2006 will berecognized as compensation expense in our consolidated statements of incomeover their remaining requisite service periods.

 

Prior to the adoption of SFAS 123R, we recordedthe intrinsic value of stock-based compensation as expense, in accordance withAPB No. 25, as allowed under SFAS No. 123, *Accounting for Stock-based Compensation Expense*(“SFAS 123”).Under the intrinsic value method, no stock-based compensation expense had beenrecorded in our consolidated statements of income prior to January 1,2006, other than as related to deferred compensation recorded as a result ofoptions assumed upon acquisitions, because the exercise price of our stockoptions granted equaled the fair market value of the underlying stock at thedate of grant. In our pro forma disclosures required under SFAS 123, weaccounted for forfeitures as they occurred.

 

SFAS 123R requires companies to estimate thefair value of share-based payment awards on the date of grant using an optionpricing model. The value of the portion of the award that is ultimatelyexpected to vest will be recognized as expense over the requisite serviceperiods in our consolidated statements of income. Stock-based compensationexpense recognized in our consolidated statements of income for the firstquarter of 2006 includes compensation expense for stock-based payment awardsgranted prior to, but not yet vested as of, January 1, 2006 based on the grantdate fair value estimated in accordance with the pro forma provisions of SFAS123, and compensation expense for the stock-based payment awards grantedsubsequent to December 31, 2005 based on the grant date fair valueestimated in accordance with the provisions of SFAS 123R. Compensation expensefor all stock-based payment awards is recognized using the ratablesingle-option approach. Stock-based compensation expense recognized in our consolidatedstatements of income for the first quarter of 2006 is based on awardsultimately expected to vest; therefore, the expense has been reduced forestimated forfeitures. SFAS 123R requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates.

 

12

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We use the Black-Scholes option pricing model(the “Black-Scholes Model”) for the purpose of determining the estimated fairvalue of stock-based payment awards on the date of grant under SFAS 123R. TheBlack-Scholes Model requires the input of certain assumptions that involvejudgment. Because our employee stock options have characteristics significantlydifferent from those of traded options, and because changes in the inputassumptions can materially affect the fair value estimate, existing models maynot provide reliable measures of fair value of our employee stock options. Wewill continue to assess the assumptions and methodologies used to calculateestimated fair value of stock-based compensation. If circumstances change, andadditional data becomes available over time, we may change our assumptions andmethodologies, which may materially impact our fair value determination.

 

We have elected to adopt the alternativetransition method, as permitted by Financial Accounting Standards Board (“FASB”)Staff Position No. FAS 123R-3, *TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards,*to calculate the tax effects of stock-based compensationpursuant to SFAS 123R for those employee awards that were outstanding uponadoption of SFAS 123R. The alternative transition method allows the use ofsimplified methods to calculate the beginning capital-in-excess-of-par poolrelated to the tax effects of employee stock-based compensation and todetermine the subsequent impact of the tax effects of employee stock-basedcompensation awards on the capital-in-excess-of-par pool and the consolidated statementsof cash flows. Prior to the adoption of SFAS 123R, we reported all tax benefitsresulting from the exercise of stock options as operating cash flows in the consolidatedstatements of cash flows. SFAS 123R requires cash flows resulting from the taxdeductions in excess of the related compensation cost recognized in thefinancial statements (excess tax benefits) to be classified as financing cashflows. In accordance with SFAS 123R, excess tax benefits recognized in periodsafter the adoption date have been properly classified as financing cash flows.Excess tax benefits recognized in periods prior to the adoption date areclassified as operating cash flows. The income tax benefits from stock optionexercises totaled approximately $3,695 and $1,904 for the three months endedMarch 31, 2006 and April 1, 2005, respectively.

 

*StockOption Program Descriptions*

 

We have stock option plans coveringsubstantially all of our employees and directors. Avocent assumed the stockoption plans and the related underlying options of Apex and Cybex at the mergereffective July 1, 2000, of Equinox at the acquisition effectiveJanuary 3, 2001, of 2C at the acquisition effective August 20, 2002and of OSA at the acquisition effective April 6, 2004. With the exceptionof the assumed OSA plan, no additional options have been or will be grantedunder these pre-existing plans. Purchase prices for common stock subject tooptions issued under the assumed plans generally approximate the fair marketvalue of the related shares at the date of grant. Generally, options vest over threeto four years and typically expire 10 years from the grant date.

 

Prior to the June 2005 shareholderapproval of the 2005 Avocent Corporation Equity Incentive Plan (the 2005 Plan),we had adopted four stock option plans, the 2000 Stock Option Plan (the 2000Plan), the 2000 Transition Nonstatutory Stock Option Plan (the TransitionPlan), the Avocent Corporation 2003 Stock Option Plan (the 2003 Plan), and theAvocent Corporation 2003 Inducement Plan (the Inducement Plan). The 2000 StockOption Plan and the 2003 Plan each provided for nonqualified and incentivestock options for officers, directors, and employees. The 2000 Transition planprovided for nonqualified and incentive stock options for employees and theInducement Plan provided for nonqualified and incentive stock options for newemployees. Options under these four plans generally expire 10 years from the dateof grant. The Purchase price for common stock subject to options issued underthese plans was the fair market value of the related shares at the date ofgrant and these options typically vest over two to four years.

 

As approved by our stockholders,the 2005 Plan authorized a total of 2,500 shares of common stock for issuance,plus (i) any shares remaining available for issuance under the previousstock option plans up to a maximum of 1,187 shares and (ii) any sharessubject to any outstanding options under our stock options plans thatsubsequently expire unexercised.  New options may no longer be grantedunder the former plans. The 2005 Plan allows for options, restricted stock,restricted stock units, stock appreciation rights, performance shares, performanceunits, deferred stock units, and dividend equivalents, and options grantedunder the 2005 Plan may be either incentive stock options or nonqualified stockoptions.  Nonqualified stock options, restricted stock, restricted stockunits, performance shares, performance units, stock appreciation rights,deferred stock units, and dividend equivalents may be granted under the 2005Plan to our directors, employees, or consultants, but incentive stock optionsmay be granted only to our employees.  Options may not be granted at lessthan the fair market value on date of grant and may not have a term of greaterthan 10 years. We issue new shares tosatisfy stock options exercised. Our Board of Directors has approved, andwe are asking our stockholders to approve at the 2006 Annual Meeting ofStockholders, an additional 2,250 shares of common stock for issuance under the2005 Plan.

 

13

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Any shares subject torestricted stock, performance shares, or restricted stock units with a pershare price less than the fair market value of our common stock on the date ofthe Award will be counted against the authorized share reserve as two sharesfor every one share subject to the Award, and if any such shares are returnedto the 2005 Plan, such shares will be counted as two shares.  If an Awardexpires or becomes un-exercisable without having been exercised in full (or,with respect to restricted stock, performance shares, or restricted stockunits, is forfeited to or repurchased by Avocent), the un-purchased shares (or,for Awards other than options and stock appreciation rights, the forfeited orrepurchased shares) will become available for future Awards. Shares ofrestricted stock, performance shares or restricted stock units that arerepurchased by Avocent at the fair market value on the date of the originalAward, or are forfeited to us, will become available for future grant under the2005 Plan.  Shares used to pay the exercise price of an option will notbecome available for future Awards, and shares used to satisfy tax withholdingobligations will also not become available for future Awards under the 2005Plan.  To the extent a 2005 Plan Award is paid out in cash rather thanstock, such cash payment will not reduce the number of shares available forissuance under the 2005 Plan.  Any payout of dividend equivalents orperformance units, because they are payable only in cash, will not reduce thenumber of shares available for issuance under the 2005 Plan.  Likewise,any forfeiture of dividend equivalents or performance units will not increasethe number of shares available for issuance under the 2005 Plan. In the firstquarter ended March 31, 2006, we granted only stock options under the 2005Plan.

 

The following schedulesummarizes the activity in our stock-based compensation plans for the threemonths ended March 31, 2006:

 
| ** **                                       | ** ** | **Number of   Options** | ** ** | **Range of   Exercise Prices** | ** ** | **Weighted Avg.   Exercise Price** | ** **      | **Vesting   Provisions** | ** **  |
|--------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|-----------------|-------------------------------|-------------|
| ** **                                       | ** ** | ** **                        | ** ** | ** **                                    | ** ** | ** **                                        | ** **      | ** **                    | ** **  |
| **Options  outstanding, December 31, 2005** | ** ** | **6,417**                         | ** ** | **$0.11 - $70.94**                  | ** ** | **$**                                             | **32.00**       | ** **                    | **Various** | ** ** |
|                                             |       |                              |       |                                          |       |                                              |            |                          |        |
| Options granted                                  |       | 8                                 |       | $28.06 – $34.64                          |       | $                                                 | 32.91           |                          | Various     |   |
|                                             |       |                              |       |                                          |       |                                              |            |                          |        |   |
| Options  cancelled/forfeited                     |       | (11                               | )          | $1.31 – $69.63                           |       | $                                                 | 35.90           |                          | Various     |   |
|                                             |       |                              |       |                                          |       |                                              |            |                          |        |   |
| Options  exercised                               |       | (915                              | )          | $0.11 - $31.00                      |       | $                                                 | 20.98           |                          | Various     |   |
|                                             |       |                              |       |                                          |       |                                              |            |                          |        |
| **Options  outstanding, March 31, 2006**    | ** ** | **5,499**                         | ** ** | **$0.11 - $70.94**                  | ** ** | **$**                                             | ** 33.82** | ** **                    | **Various** | ** ** |

 

Thetotal pretax intrinsic value of options exercised during the three months endedMarch 31, 2006 was $11,121.

 

Thefollowing table summarizes information about stock options outstanding atMarch 31, 2006:

 
| **Range of Exercise   Prices** | ** ** | **Number   Outstanding** | ** ** | **Weighted Avg.   Remaining   Contractual Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted Avg.   Exercise Price** | ** ** | **Number   Exercisable** | ** ** | **Weighted Avg.   Exercise Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------------|------------|-------------------------------|------------|---------------------------------------------------|------------|---------------------------------|------------|
| $0.11 - $9.48                                 |       | 99                            |       | 5.19                                                                 |       | $                               | 2,792      |                                              | $          | 3.61                          |       | 87                                                |       | $                               | 3.93       |   | $ | 2,417 |   |
| $10.46 - $20.00                               |       | 220                           |       | 4.88                                                                 |       | $                               | 3,560      |                                              | $          | 15.57                         |       | 197                                               |       | $                               | 15.55      |   | $ | 3,190 |   |
| $20.33 – 29.95                           |       | 2,793                         |       | 6.74                                                                 |       | $                               | 18,608     |                                              | $          | 25.08                         |       | 2,737                                             |       | $                               | 25.11      |   | $ | 18,144 |   |
| $30.02 - $44.25                               |       | 925                           |       | 7.74                                                                 |       | $                               | 36         |                                              | $          | 38.37                         |       | 908                                               |       | $                               | 38.48      |   | $ | 30 |   |
| $46.19 - $70.94                               |       | 1,462                         |       | 4.47                                                                 |       | —                          |       | $                                                 | 52.46      |                          | 1,462      |                                              | $          | 52.46                           |       | — |   |
|                                          |       |                          |       |                                                                 |       |                            |       |                                              |       |                          |       |                                              |       |                            |       |
| **Total**                                     | ** ** | **5,499**                     |       |                                                                 | ** ** | $                               | 24,996     |                                              | $          | 33.82                         |       | **5,391**                                         |       | $                               | 34.09      |   | $ | 23,781 |   |

 

Theaggregate intrinsic value in the preceding table represents the total pretaxintrinsic value, based on our closing price of $31.74 as of March 31, 2006,which would have been received by option holders had all option holdersexercised their options on that date. The total number of in-the-money optionsexercisable as of March 31, 2006 was 3,048. As of December 31, 2005, 6,248options were exercisable and the weighted average exercise price was $32.33.

 

14

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*Valuationand Expense Information*

 

The following table summarizes stock-basedcompensation expense related to employee stock options under SFAS 123R for thethree months ended March 31, 2006, which was allocated as follows:

 
| ** **                                                       | ** ** | **Three Months Ended   March 31, 2006** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | ** **                                                       | ** ** |
| Cost of sales                                                    |       | $                                                                | 50         |   |
|                                                             |       |                                                             |       |
| Research and  development                                        |       | 301                                                              |       |
| Selling, general  and administrative                             |       | 490                                                              |       |
|                                                             |       |                                                             |       |
| Stock-based  compensation expense included in operating expenses |       | 791                                                              |       |
|                                                             |       |                                                             |       |
| Total  stock-based compensation expense                          |       | 841                                                              |       |
|                                                             |       |                                                             |       |
| Tax benefit                                                      |       | (261                                                             | )          |
|                                                             |       |                                                             |       |
| **Total  stock-based compensation expense, net of tax**          | ** ** | **$**                                                            | **580**    | ** ** |

 

Werecorded $509 of stock compensation expense during the three months ended April1, 2005 related to the amortization of deferred compensation recorded as aresult of assumed options from the acquisition of OSA Technologies Inc.

 

Thetable below illustrates the effect on net income and earnings per share as ifwe had applied the fair-value recognition provisions of SFAS 123 to all of ourstock-based compensation awards for periods prior to the adoption of SFAS 123R,and the actual effect on net income and earnings per share for periodssubsequent to adoption of SFAS 123R.

 
| ** **                                                                                                                              | ** ** | **For the Three  Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **April 1, 2005**                    | ** ** |
| Net income — as  reported                                                                                                          |       | $                                              | 1,834      |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                            |       | 509                                            |       |
| Deduct: Total  stock based employee compensation expense determined under fair value method  for all awards, net of related tax effects |       | (5,019                                         | )          |
| Net income (loss)  — pro forma                                                                                                     |       | $                                              | (2,676     | ) |
|                                                                                                                                    |       |                                           |       |
| Basic earnings  per share — as reported                                                                                            |       | $                                              | 0.04       |   |
| Basic earnings  (loss) per share — pro forma                                                                                       |       | $                                              | (0.05      | ) |
| Diluted earnings  per share — as reported                                                                                          |       | $                                              | 0.04       |   |
| Diluted earnings  (loss) per share — pro forma                                                                                     |       | $                                              | (0.05      | ) |

 

Asof January 1, 2006, total pre-tax compensation cost related to non-vestedstock options not yet recognized was approximately $1,900, which is expected tobe recognized over the next 18 months using the ratable single-option approach.

 

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Ofthis amount, we expensed $841 in the first quarter of 2006 and expect toexpense approximately $400 in the second quarter of 2006, $275 in the thirdquarter of 2006 and $200 in the fourth quarter of 2006.

 

Weestimate the fair value of options using the Black-Scholes Model. This modelrequires the input of assumptions regarding a number of complex and subjectivevariables that will usually have a significant impact on the fair valueestimate. These variables include, but are not limited to, the volatility ofour stock price and employee exercise behaviors. The assumptions and variablesused for the current period grants were developed based on SFAS 123R and SECguidance contained in SAB 107. The weighted-average estimated fair value ofstock options granted to employees during the three months ended March 31,2006 was $13.29 per share using the Black-Scholes Model with the followingweighted-average assumptions:

 
| ** **                | ** ** | **Three Months Ended   March 31, 2006** | ** ** |
|---------------------------|------------|------------------------------------------------------------------|------------|
|                      |       |                                                             |       |
| Expected  volatility      |       | 45.34                                                            | %          |
|                      |       |                                                             |       |
| Risk-free  interest rate  |       | 4.56                                                             | %          |
|                      |       |                                                             |       |
| Expected  dividend yield  |       | —                                                           |       |
|                      |       |                                                             |       |
| Expected life  (in years) |       | 3.91                                                             |       |

 

Webased our estimate of expected volatility for the three months endedMarch 31, 2006 on the sequential historical daily trading data of ourcommon stock for a period equal to the expected life of the options granted.The selection of the historical volatility approach was based on available dataindicating our historical volatility is as equally representative of our futurestock price trends as is implied volatility.

 

Therisk-free interest rate assumption is based upon implied yields of U.S.Treasury zero-coupon bonds on the date of grant having a remaining term equalto the expected life of the options granted. The dividend yield is based on ourhistorical and expected dividend payouts.

 

Theexpected life of our employee stock options is based upon historical exerciseand cancellation activity of our previous stock-based grants with a ten-yearcontractual term.

 

Stock-basedcompensation expense recognized in our consolidated statements of income forthe three months ended March 31, 2006 is based on options ultimatelyexpected to vest, and has been reduced for estimated forfeitures. Theseestimates were based upon historical experience.

 

Wehave used third-party analyses to assist in developing some of the assumptionsused in our Black-Scholes Model. We will continue to assess the assumptions andmethodologies used to calculate estimated fair value of stock-basedcompensation. If circumstances change, and additional data becomes availableover time, we may change our assumptions and methodologies, which maymaterially impact our fair value determination.

 

*Pro Forma Information Under SFAS 123 for Periods Prior toJanuary 1, 2006*

 

Theweighted-average estimated value of stock options granted to employees anddirectors during the three months ended April 1, 2005 was $15.38 per shareusing the Black-Scholes model with the following weighted-average assumptions:

 
| ** **                | ** ** | **Three Months Ended  April 1, 2005** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|
|                      |       |                                                 |       |
| Expected  volatility      |       | 46.98                                                | %          |
|                      |       |                                                 |       |
| Risk-free  interest rate  |       | 3.81                                                 | %          |
|                      |       |                                                 |       |
| Expected  dividend yield  |       | —                                               |       |
|                      |       |                                                 |       |
| Expected life  (in years) |       | 3.81                                                 |       |

 

 

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Priorto the adoption of SFAS 123R, the expected life and expected volatility of thestock options were based upon historical and other economic data. Forfeituresof stock options were accounted for as they occurred.

 

**Note 14.**Recently Issued Accounting Standards

** **

InNovember 2005, the FASB issued Financial Statement of Position (“FSP”) FAS115-1 and FAS 124-1, *The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.*ThisFSP addresses the determination as to when an investment is consideredimpaired, whether that impairment is other-than-temporary, and the measurementof an impairment loss. This FSP also includes accounting considerationssubsequent to the recognition of other-than-temporary impairments, and requirescertain disclosures about unrealized losses that have not been recognized asother-than-temporary impairments. The guidance in the FSP is effective forreporting periods beginning after December 15, 2005 and we adopted iteffective January 1, 2006. The adoption of this FSP did not have amaterial impact on our consolidated results of operations or financialcondition.

 

**Note 15. Subsequent Events**

** **

In April 2006, weannounced the signing of a definitive agreement to acquire LANDesk GroupLimited, a privately-held company based Salt Lake City, Utah.  LANDeskemploys approximately 500 people, located primarily in the United States,Europe and Asia. The LANDesk product lines include software for the centralizedmanagement and protection of information technology assets. The agreementprovides for total consideration of approximately $416,000, includingapproximately $200,000 in stock, approximately $200,000 in cash andapproximately $16,000 in intrinsic value of assumed options. The transactionvalue may be increased by up to $60,000 in cash if LANDesk meets certain revenuegrowth targets specified in the agreement. An escrow account with $60,000 ofthe stock consideration for indemnifiable events specified in the acquisitionagreements will be open for 18 months. We expect to close this transactionearly in the third quarter of 2006.

 

In April 2006, weobtained a commitment letter from a bank fora five year senior revolving credit facility for an aggregate principalamount up to $100,000. Therewere no amounts outstanding under this credit facility at the time of thisfiling.

 

In April 2006, our Board of Directors approved the grant of 896restricted stock and performance share awards to our executive officers,directors and other employees. The awards will vest over two or three years andin some cases are subject to the achievement of certain performance goals. Weexpect to recognize stock compensation expense related to these awards of approximately$2,000 in the second quarter of 2006, $3,000 in each of the third and fourthquarters of 2006.

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

** **

*THE INFORMATION IN THISITEM 2**“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS”**CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTSRELATING TO OUR FUTURE BUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL;STATEMENTS REGARDING OUR ABILITY TO PREDICT FUTURE SALES AND MANAGE INVENTORYLEVELS; STATEMENTS REGARDING PRICING PRESSURE; STATEMENTS REGARDING THEFLUCTUATION OF OUR REVENUE GROWTH IN RELATION TO ECONOMIC CONDITIONS AND ITRELATED SPENDING TRENDS; STATEMENTS REGARDING OUR PRODUCT PLATFORMS ANDOUR  ABILITY TO RESUME GROWTH IN OUROVERALL BUSINESS; STATEMENTS REGARDING INCREASED SALES OF OUR DIGITAL PRODUCTSAND EMBEDDED SOLUTIONS AND THEIR ABILITY TO OFFSET PRICE DECLINES ANDCOMPETITIVE FACTORS; STATEMENTS REGARDING OUR GROSS MARGINS, OUR RESEARCH ANDDEVELOPMENT EXPENSES AND OUR SELLING, GENERAL AND ADMINISTRATIVE EXPENSES INTHE SECOND QUARTER OF 2006; STATEMENTS REGARDING OUR LEGAL COSTS FOR PATENT ANDOTHER LITIGATION MATTERS; STATEMENTS REGARDING THE CLOSING OF THE LANDESKACQUISITION; AND STATEMENTS REGARDING THE IMPACT OF SFAS 123R ON OUR RESULTS OFOPERATIONS AND EARNINGS PER SHARE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECTTO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TODIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO THOSEDISCUSSED IN ITEM 1A “RISK FACTORS.”*

 

**Overview**

 

Avocent designs,manufactures, licenses, and sells products and technologies that provideconnectivity and centralized management of information technology (IT)infrastructure. We (meaning Avocent and its wholly-owned subsidiaries) provide connectivityand management products and technologies that centralize control of servers,desktop computers, serial devices, wireless devices, mobile devices, andnetwork appliances, thus increasing the efficiency of IT personnel. Servermanufacturers resell private-labeled Avocent KVM (keyboard, video, and mouse)switches and embedded technology in their systems, and companies large andsmall utilize our products and technologies for managing their growing ITinfrastructure.

 

For a description of our products, technologies andmarkets, please refer to our Form 10-K, which was filed on March 6, 2006.

 

A substantial portion of our revenue is derived fromsales to major server OEMs who purchase our switching systems on aprivate-label or branded basis for integration and sale with their ownproducts, sales through our reseller and distributor network, and sales to alimited number of direct customers. Sales to our OEM customers accounted for49% of sales in the first quarter of 2006 and 52% of sales in the first quarterof 2005. Sales to our branded customers accounted for 51% of sales in the firstquarter 2006 and 48% of sales in the first quarter of 2005. We do not havecontracts with many of our branded customers, and in general, our OEM andbranded business customers are obligated to purchase products from us onlypursuant to binding purchase orders. The loss of, or material decline in ordersfrom, these customers would have a material adverse effect on our business,financial condition, results of operations, and cash flows. Our top fivecustomers include both OEM and branded customers, and accounted for 65% ofsales in the first quarter of both 2006 and 2005.

 

We sell products to dealers, end-users, and OEMs inthe United States, Canada, Europe, and Asia as well as in other foreignmarkets. Sales within the United States accounted for approximately 55% offirst quarter sales in 2006 and 52% of first quarter sales in 2005. Sales outsideof the United States accounted for 45% of first quarter sales in 2006 and 48%of first quarter sales in 2005. No foreign country accounted for more than 10%of sales in 2006. Sales to customers in the Netherlands, including the Europeandistribution facility for one of our OEM customers, accounted for 11% of ourfirst quarter sales in 2005. No other country accounted for more than 10% ofsales in the first quarter of 2005.

 

In prior years, we have reported our operations as asingle operating segment. However, in the first quarter of 2006, we organizedour business into five divisions:

•      TheManagement Systems Division, which includes our branded and OEM KVM, serialconsole, power control and management appliance businesses;

•      TheEmbedded Software and Solutions Division, which focuses on developing and marketingembedded systems and software including IPMI and embedded KVM technologiesprimarily for our OEM customers;

•      TheConnectivity and Control Division, which focuses on expanding the markets forAvocent’s serial and wireless 

 

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products;

•      TheDesktop Solutions Division, which will focus on developing new products tofacilitate client blade deployments; and

•      TheMobile Technologies Division, which includes mobile device management andsecure wireless systems administration.

 

Our Management Systems Division accounted for 89% ofsales in the first quarter 2006 and 91% of sales in the first quarter 2005. OurEmbedded Software and Solutions Division accounted for 6% of sales in the firstquarter of 2006 and 5% of sales in the first quarter of 2005.

 

With continued industry-wide initiatives to reduce allchannel inventories and to shorten lead times, trends with our major customersare, generally, to reduce the number of weeks of forward-committed firm orders.This trend continues to affect our business with certain distributors,OEMs and other server manufacturers, and we believe that it will continueto make our future sales more difficult to predict and inventory levels moredifficult to manage.

 

We continue to experiencesignificant price competition in the market for all of our products, and weexpect that pricing pressures will continue in the future. In addition, generaleconomic conditions are not predictable, and we expect our revenue growth rateto fluctuate in relation to economic conditions and IT related spending trends.Depending on future general economic conditions and other factors, our revenuecould decline in the future.

 

Many of our executiveofficers and directors are vested in significant amounts of options to purchaseshares of our common stock and continue to vest in additional shares on aregular basis. These officers and directors have informed us that they havesold, and may sell additional, shares of our common stock to provide liquidityand diversify their portfolios. In April 2006, our Board of Directors approvedapproximately 896,000 restricted and performance stock awards to our executiveofficers, directors and other employees. These awards will vest over two orthree years and in some cases are subject to the achievement of certainperformance goals.

 

Our Board of Directorsrecently approved stock ownership guidelines for our directors and seniorcorporate officers. Under these ownership guidelines, the non-executive membersof our Board of Directors would be expected to own Avocent stock with a valueequal to at least their annual Board retainer, our Chief Executive Officerwould be expected to own Avocent stock with a value equal to at least threetimes his base salary, our President and Chief Operating Officer would beexpected to own Avocent stock with a value equal to at least one and one-halftimes his base salary, and our other senior officers would be expected to own Avocentstock with a value equal to at least the officer’s base salary. These ownershiplevels would be achieved over a period of time by requiring the director or theofficer to retain a significant portion of any restricted stock award untilsuch time as the required minimum ownership level is reached.

 

**Results of Operations**

 

The following table setsforth, for the periods indicated, selected statement of income data expressedas a percentage of net sales:

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **March 31,   2006**   | ** ** | **April 1,  2005** | ** ** |
| Net sales                                              |       | 100.0                            | %          | 100.0 | % |
| Cost of sales                                          |       | 40.8                             |       | 43.3 |   |
| Gross profit                                           |       | 59.2                             |       | 56.7 |   |
| Operating  expenses:                                   |       |                             |       |   |   |
| Research and  development expenses                     |       | 14.0                             |       | 18.8 |   |
| Acquired  in-process research and development expenses |       | 2.2                              |       | — |   |
| Selling, general  and administrative expenses          |       | 24.7                             |       | 29.0 |   |
| Amortization of  intangible assets                     |       | 2.5                              |       | 8.6 |   |
| Total operating  expenses                              |       | 43.4                             |       | 56.4 |   |
|                                                   |       |                             |       |   |   |
| Income from  operations                                |       | 15.8                             |       | 0.3 |   |
| Net investment  income                                 |       | 3.3                              |       | 2.6 |   |
| Net realized  investment losses                        |       | (0.1                             | )          | (0.2 | ) |
| Other income  (expense), net                           |       | —                           |       | 0.1 |   |
| Income before  provision for income taxes              |       | 19.0                             |       | 2.8 |   |
| Provision for  income taxes                            |       | 5.3                              |       | 0.4 |   |
| Net income                                             |       | 13.7                             | %          | 2.4 | % |

 

*Net sales.*Net sales increased23% to $94.5 million for the first quarter of 2006 from $76.8 million for thefirst quarter of 2005. The increase in sales resulted primarily from therevenue shortfall experienced in the first quarter of 2005, which was primarilydue to problems related to the launch of a significant upgrade to the softwarecomponent of our digital switching systems and lower than expected sales to oneof our OEM customers. We also recorded $1.5 million in revenue from ourCyclades acquisition during the first quarter of 2006, which contributed to thesales increase. We experienced improved results in all areas of our businesscompared to the first quarter of 2005. Branded sales increased 30% from $36.7million in the first quarter of 2005 to $47.9 million in the first quarter of2006. As a percentage of sales, branded revenue accounted for 51% of sales inthe first quarter of 2006 and 48% of revenue 

 

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in the first quarter of 2005. OEM sales grew 16% from $40.1 million inthe first quarter of 2005 to $46.6 million in the first quarter of 2006. OEMsales were 49% of sales for the first quarter of 2006, compared to 52% of salesfor the first quarter of 2005. Sales of our digital products represented 54% ofour revenue in the first quarter of 2006 compared to 50% of our revenue in thefirst quarter of 2005.

 

From a divisional perspective, revenues from both ourManagement Systems Division, which comprises our traditional KVM business andalso includes revenue from Cyclades, and our Embedded Software and SolutionsDivision, which includes our embedded KVM and IPMI solutions, increased fromthe first quarter of 2005 to the first quarter of 2006. Revenue from theManagement Systems Division increased to $84.4 million in the first quarter of2006 from $69.8 million in the first quarter of 2005 and accounted for 89% orour revenue in the first quarter of 2006 and 91% of our revenue in the firstquarter of 2005. Our Management Systems division comprises a majority of ourrevenue and experienced an increase for the first quarter of 2006 primarily forthe reasons listed above, including the additional sales contributed by ouracquisition of Cyclades and the increase in revenues from our digital productline. Revenue from our Embedded Software and Solutions Division increased to$6.1 million in the first quarter of 2006 from $3.8 million in the firstquarter of 2005 and accounted for 6% of our revenue in the first quarter of2006 and 5% of our revenue in the first quarter of 2005. The increase inrevenue can be attributed primarilyto the increased revenue contribution of the embedded KVM solutions as adoptionof these platforms by our OEM customers increases.

 

Sales within the United States improved 31% to $52.4million in the first quarter of 2006 from $40.0 million in the first quarter of2005, due to improvements in both branded and OEM sales. International salesincreased 14%, to $42.1 million in the first quarter of 2006 from $36.8 millionin the first quarter of 2005, primarily as a result of increased OEM sales inEurope and Asia and improved branded sales in Asia. Sales within the UnitedStates were 55% of sales in the first quarter of 2006, compared to 52% of salesfor the first quarter of 2005. International sales were 45% of sales in thefirst quarter of 2006 and 48% of sales for the first quarter of 2005.

 

In recent years, we have experienced a sequentialincrease in revenues from the first quarter to the second quarter primarily asa result of similar trends in IT spending for this period, specifically serverpurchase trends. In addition, our second quarter will also include a fullquarter of revenue from Cyclades. Generally, we believe the tone of ourbusiness is positive and industry analysts continue to forecast growth in ITspending and server shipments on a year-over-year basis. Accordingly, for thesecond quarter of 2006, we expect revenue to be in the $114 to $118 millionrange.

 

*Grossprofit.* Gross profit is affected by a variety of factors,including the ratio of sales among our distribution channels, as OEM sales havelower gross margins than our branded sales; absorption of fixed costs as saleslevels fluctuate; product mix, raw materials, and labor costs; new productintroductions by us and by our competitors; and the level of our outsourcing ofmanufacturing and assembly services. Gross profit increased to 59.2% in thefirst quarter 2006 compared to 56.7% in the first quarter of 2005. The primaryreason for the improved margins in 2006 relates to the effect of higher revenuein the first quarter of 2006 as compared to the first quarter of 2005. Theincreased revenue better covered the fixed costs related to procurement,warehousing, and shipping. Also, increased sales of our digital solutions,which are sold through our Management Systems Division, positively affected ourmargins in the first quarter of 2006 as compared to the first quarter of 2005 asour digital solutions carry higher margins than our analog solutions. Increasedsales by our Embedded Software and Solutions Division in the first quarter of2006 as compared to the first quarter of 2005 also had a positive impact onmargins as these products have higher margins than our traditional KVMproducts.

 

We expect to have a fullquarter of sales contribution from Cyclades, as well as continued positivecontributions from our digital products and higher revenues from our embeddedsolutions in the second quarter of 2006, which will have a positive affect onour gross margin. We expect the combination of these factors to offset pricedeclines, the additional costs expected from complying with new environmentalregulations, and competitive factors in the second quarter of 2006.Accordingly, we expect gross margins to be between 59% and 60% in the secondquarter of 2006.

 

*Researchand development expenses.*Research and development expenseswere $13.2 million, or 14.0% of sales, in the first quarter of 2006 compared to$14.5 million, or 18.8% of net sales, in the first quarter of 2005. Thedecrease in the amount spent on research and development is primarily due tothe savings we experienced from the research and development site closings andconsolidation of projects completed during 2005. Compared to the first quarterof 2005, research and development costs decreased $1.3 million primarily due tothe reduced headcount and other savings related to these site closings.

 

We believe that thetimely development of innovative products and enhancements to existing productsis essential to maintaining our competitive position, and we will continue tomake significant investments in research and development. As highlighted above,we implemented plans during the second half of 2005 to contain the growth inlegacy Avocent spending. However, we will have a full quarter of research anddevelopment expense from our Cyclades acquisition, including severance accrualsand retention bonuses related to the integration of research and developmentteams. We believe these factors will result in research and developmentexpenses in the range of $15 to $16 million for the second quarter of 2006.

 

*Acquiredin-process research and development expense.*Acquisitionrelated expenses in 2006 were comprised solely of the

 

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non-recurring write-off of $2.1 million of in-process research anddevelopment expense related to the acquisition of Cyclades. There were no suchcharges in the first quarter of 2005.

 

***Selling, general and administrative expenses.***Selling, general andadministrative expenses were $23.4 million, or 24.7% of net sales, for thefirst quarter of 2006 compared to $22.3 million, or 29.0% of net sales, for thefirst quarter of 2005. The increase in selling, general and administrativeexpenses is attributed to higher legal fees associated with protecting ourintellectual property rights as well as increases in advertising and promotioncosts during the first quarter of 2006 to support our newer products.

** **

**We will be working to integrate the Cyclades salesforces, marketing efforts, and administrative functions during the second andthird quarters of 2006,**and we will incur additionalcostsincluding severance accruals and retention bonusesrelated to the integration of the Cyclades sales, marketing, and administrationteams. Additionally, legal costs are expected to rise in the second quarter of2006 related to our ongoing efforts to protect our intellectual property as theClearCube case is scheduled for trial during July 2006. As a result of thesefactors, we expect selling, general and administrative expenses to be in therange of $30 to $32 million in the second quarter of 2006.

** **

***Amortization of intangible assets***. Amortization of $2.4 million inthe first quarter of 2006 was primarily comprised of the amortization of theidentifiable intangible assets created as a result of the acquisitions of 2C,Soronti, Crystal Link, OSA, and Sonic Mobility. Amortization of $6.6 million inthe first quarter of 2005 was primarily comprised of the amortization of theidentifiable intangible assets created as a result of the merger transactionbetween Apex and Cybex and the acquisitions of Equinox, 2C, Soronti, CrystalLink, OSA, and Sonic Mobility. The decrease in amortization expense relatesprimarily to recording no amortization expense for developed technology orpatents and trademarks recorded on the merger of Apex and Cybex, as theseassets had an estimated life of five years and were fully amortized at the endof the second quarter of 2005. However, we expect amortization of intangiblesto increase by over $2 million in the second quarter of 2006 compared to the firstquarter of 2006 as we begin amortizing the intangibles associated with theacquisition of Cyclades.

** **

*StockCompensation.*We adopted adoptedSFAS 123 (revised 2004), *Share-Based Payment,* on January1, 2006 and as a result record stock compensation expense forall share-based payment awards made to employees and directors, includinggrants of employee stock options, based on estimated fair values. Thecompensation expense is recorded in each line of our consolidated statements ofincome based on the department which an employee works. For the first quarterof 2006, we expensed $841,000 of stock based compensation;  $50,000 recorded in cost of goods sold,$301,000 was recorded in research and development expense and $490,000 wasrecorded in selling, general and administrative expenses.

 

For optionsoutstanding as of March 31, 2006, we expect to record stock compensationexpense approximately $400,000 in the second quarter of 2006, $275,000 in thethird quarter of 2006 and $200,000 in the fourth quarter of 2006. In April2006, our Board of Directors approved the grant of 896,000 restricted stock andperformance share awards to our executive officers, directors and otheremployees. The awards will vest over two or three years and in some cases aresubject to the achievement of certain performance goals. We expect to recognizestock compensation expense related to these awards of approximately $2 millionin the second quarter of 2006, $3 million in each of the third and fourthquarters of 2006. We believe equity based compensation is an important part ofour total compensation package and is needed to attract and retain keyemployees.

 

*Net investment income**.***Net******investment income increased to $3.1million in the first quarter of 2006 as compared to $2.1 million in the firstquarter of 2005. The improved results were the result of higher interest rateson investments resulting in higher returns for the first quarter of 2006. Weexpect our investment income to decrease in the second quarter of 2006 due tolower cash and investments resulting from funding the purchase of Cyclades andour share repurchases in the first quarter of 2006.

 

*Net realized investment losses.*Netrealized investment losses decreased from $177,000 in the first quarter of 2005to $55,000 in first quarter of 2006.

 

*Other income (expense), net.*Netother income (expense) declined from income of $61,000 in the first quarter of2005 to an expense of $20,000 in the first quarter of 2006.

 

*Provision for income taxes.* Theeffective tax rate in the first quarter of 2006 was approximately 27.9%compared to an effective tax rate of approximately 14.8% in the first quarterof 2005.  The provision for income taxes was approximately $5.0million for the first quarter of 2006, compared to $319,000 in the firstquarter of 2005. The increase in the effective tax rate was partly the resultof the change in the mix of our pre-tax profit among our U.S. and internationalcompanies.  Additionally, the Irish statutory tax rate on manufacturedgoods increased from 10% to 12.5% on January 1, 2006. The U.S. Research andDevelopment credit also has expired, and as of March 31, 2006, this credit hasnot yet been reinstated by Congress. Finally, the Cyclades purchase includedIn-process Research and Development, which was immediately expensed upon thepurchase. This item has no tax basis, and therefore, increased the effectivetax rate for the quarter. These increases were slightly offset by increasedinvestment in tax-free municipal bonds at a higher return as compared to thefirst quarter of 2005.

 

*Netincome.*Net income for the first quarter of 2006 was $12.9million compared to $1.8 million for the first quarter of 2005, as a result ofthe factors detailed in the above discussion. Net income, as a percentage ofsales for the first quarter of 2006, was 13.7% compared to 2.4% for the firstquarter of 2005.

 

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**Liquidity and Capital Resources**

 

As of March 31, 2006, our principal sources ofliquidity consisted of $284 million in cash, cash equivalents, and investments.Cash, cash equivalents and investments includes $17 million of undistributedproceeds to former Cyclades shareholders which was distributed in April 2006.We have no outstanding debt or available credit facilities as of this filing.However, we have obtained a commitment letter from a bank for a $100 millionrevolving line of credit which we expect to finalize during the second quarterof 2006.

 

Our operating activities generated cash of $16.6million in the first three months of 2006, compared to approximately $10million in the first three months of 2005. The improvement in positive cashflow in the first quarter of 2006 is primarily the result of increased earningsin the first quarter of 2006. Other factors affecting cash flow from operationswere decreases in accounts receivables and increases to inventories during thefirst quarter of 2006. Inventories increased almost $2.0 million from December31, 2005 to March 31, 2006, which excludes the impact of $7.0 millionof inventory received at the acquisition of Cyclades at the end of the quarter.The increase in inventory was primarily the result of adding inventory relatedto our recent product introductions and in anticipation of expected highersales. Accordingly, as a result of the higher sales volume, offset somewhat bythe increased inventories, our inventory turns increased to 6.5 in the firstquarter of 2006 from 5.5 for the first quarter of 2005. Excluding the impact ofover $10 million of receivables received at the acquisition of Cyclades, ourreceivables decreased over $6.5 million from December 31, 2005 to March 31,2006 and positively impacted cash flows for the first quarter 2006. Althoughour receivables balance declined, our DSO remained constant at approximately 59days for the first quarter of 2006 compared to the first quarter of 2005, butit is still slightly better than our goal of 60 days. DSO increased as a resultof the increasing sales that occurred late in the first quarter of 2006. Adecline in accrued compensation and accounts payable also affected cash flowfrom operations for the first quarter of 2006. The taxbenefit from stock-based compensation was reported in cash flow fromoperations in the first quarter of 2005, but as a result of new equity-basedcompensation accounting rules is now reported in financing activities, andaffected cash flow from operations for the first quarter of 2006.

 

In the ordinary course ofour business, we may at any point in time have a significant amount of contractualcommitments not yet recognized in our financial statements. These commitmentsrelate primarily to our need to schedule the purchase of inventories in advanceof the related forecasted sales to customers. We have longer lead times for theproducts we purchase from suppliers based in Asia than those for our U.S. basedand European suppliers. Our actual contractual commitments are typicallylimited to products needed for one to three months of forecasted sales. Theliabilities for these inventory purchases along with the related inventoryassets are typically recognized upon our receipt of the products. We also haveat any point in time a variety of short term contractual commitments forservices such as advertising, marketing, accounting, legal, and research anddevelopment activities. The liabilities for these services and the relatedexpenses are typically recognized upon our receipt of the related services. Asof March 31, 2006, we had approximately $26.8 million of such purchasecommitments. None of our expected purchase commitments requires payment beyondthe next year.

 

We intend to use a portion of our cash and investmentsfor strategic acquisitions of technologies and companies that will enhance andcomplement our existing technologies and help increase our sales.

 

We repurchased 825,000 shares of our common stock fora total cost of approximately $27 million during first quarter of 2006 underthe stock repurchase program approved by our Board of Directors. We mayrepurchase an additional 400,000 shares under this program and expect torepurchase shares from time to time, particularly to offset dilution fromequity compensation awards.

 

**Investments**

 

Our investments consist of corporate bonds, municipalbonds, commercial paper, mortgage backed securities guaranteed by U.S.government agencies, and common stock. We classify our debt and equitysecurities as available-for-sale securities and report them at fair value, withunrealized gains and losses excluded from earnings and reported as a separate componentof stockholders’ equity. We periodically review our investment portfolio forinvestments considered to have sustained an other-than-temporary decline invalue. Upon review of our investment portfolio as of March 31, 2006, noinvestments were considered to have sustained an other-than-temporary decline,and no charge was recorded in the first quarter of 2006.

 

**CertainTransactions**

 

***Acquisition of Cyclades Corporation***

** **

On March 30, 2006, we acquired Cyclades Corporation, aprivately-held company based in Fremont, California, for approximately $90million in cash plus an additional $2 million in transaction costs. Cycladesalso has operations in Sao Paolo, Brazil and Munich, Germany and employsapproximately 350 people in 19 locations around the world. The Cyclades productlines include serial and power management products. The acquisition of Cycladeswill enhance our position in the Linux server and networking infrastructuremanagement market and provides complementary products to our product lines allowingus to provide our customers a

 

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more integrated platform for managing their IT infrastructure. Cycladeshad unaudited revenues of approximately $60 million in 2005 and unauditedoperating profit of approximately $2 million in 2005. The results of Cyclades’operations have been included in the consolidated financial statements sincethe date of acquisition.

 

**The acquisition was recorded under the purchase methodof accounting, and the purchase price was allocated based on the fair value ofthe assets acquired and liabilities assumed. In accordance with generallyaccepted accounting principles, purchased research and development costsallocated to patent-pending technology were capitalized and will be amortizedover the respective estimated useful lives. The remaining amounts of purchasedresearch and development were expensed upon the closing of the transaction. Thegoodwill recorded as result of the acquisition will not be amortized but willbe included in our annual review of goodwill for impairment. Additionally, thegoodwill recorded is not tax deductible.**

** **

***Announced Acquisition of LANDesk Group Limited***

** **

**In April 2006, we announced the signing of a definitiveagreement to acquire LANDesk Group Limited, a privately-held company based SaltLake City, Utah.  LANDesk employs approximately 500 people, locatedprimarily in the United States, Europe, and Asia. The LANDesk product linesinclude software for the centralized management and protection of informationtechnology assets. The agreement provides for total consideration ofapproximately $416 million, including approximately $200 million in stock,approximately $200 million in cash and approximately $16 million in intrinsicvalue of assumed options. The transaction value may be increased by up to $60million in cash if LANDesk meets certain financial targets specified in theagreement. An escrow account with $60 million of the stock consideration willbe held for specified indemnifiable claims for 18 months. We expect to closethis transaction early in the third quarter of 2006. LANDesk had revenues ofapproximately $84 million in 2005 and operating profit of approximately $7million in 2005.**

** **

**Recently Issued Accounting Standards andRegulatory Standards**

 

In November 2005, theFASB issued Financial Statement of Position (“FSP”) FAS 115-1 and FAS 124-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments.*This FSP addresses thedetermination as to when an investment is considered impaired, whether thatimpairment is other-than-temporary, and the measurement of an impairment loss.This FSP also includes accounting considerations subsequent to the recognitionof other-than-temporary impairments, and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. The guidance in the FSP is effective for reporting periodsbeginning after December 15, 2005 and we adopted it effectiveJanuary 1, 2006. The adoption of this FSP did not have a material impacton our consolidated results of operations or financial condition.

 

**Item 3.****Quantitative and Qualitative Disclosures About Market Risk.**

 

Our primary market risk is the potential loss arisingfrom increases in interest rates, which could have an adverse impact on thefair value of our investment securities. Our investment policy is to manage ourinvestment portfolio to preserve principal and liquidity while maximizing thereturn on our investment portfolio through the investment of available funds.We diversify our investment portfolio by investing in a variety of highly-ratedinvestment-grade securities and through the use of different investmentmanagers. Our investment securities portfolio is primarily invested insecurities with maturities (or interest rate resets) of two years or less withat least an investment grade rating to minimize interest rate and credit riskas well as to provide for an immediate source of funds. Market risk, calculatedas the potential change in fair value in our investment portfolio resultingfrom a hypothetical 10% change in interest rates, was not material at March 31,2006. We generally hold investment securities until maturity.

 

We also face foreign currency exchange rate risk tothe extent that the value of certain foreign currencies relative to the U.S.dollar affects our financial results. Our international operations transact aportion of our business in currencies other than the U.S. dollar, predominantlythe euro, and changes in exchange rates may positively or negatively affect ourrevenues, gross margins, operating expenses, and retained earnings since thesetransactions are reported by us in U.S. dollars. We occasionally purchaseforeign currency forwards aimed at limiting the impact of currencyfluctuations. These instruments provide only limited protection againstcurrency exchange risks, and there can be no assurance that such an approachwill be successful, especially if a significant and sudden decline occurs inthe value of local currencies. As of March 31, 2006, we had one open forwardcontract with an approximate fair value of zero.

 

**Item 4.****Controls and Procedures.**

 

(a) *Evaluation of disclosure controls and procedures.*Basedon their evaluation as of March 31, 2006, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934) are effective to ensure that information required to be disclosed byus in reports

 

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that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

(b) *Changes in internal control over financial reporting*.There were no changes in our internal controls over financial reporting duringthe quarter ended March 31, 2006 that materially affected or is reasonablylikely to materially affect, our internal controls over financial reportingexcept for that we acquired Cyclades Corporation at the end of our firstquarter of 2006. We have begun the integration of Cyclades into our company andexpect to continue to integrate the Cyclades processes into the Avocent processesduring 2006.

 

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### **PART II — OTHERINFORMATION**

** **

**Item 1.****    LegalProceedings.**

 

In October 2003, Avocentfiled a complaint for patent infringement in the United States District Courtfor the Northern District of Alabama against ClearCube Technology, Inc. TheClearCube complaint seeks injunctive relief, damages, attorneys’ fees, andcosts under two of the Companies patents. ClearCube has filed counterclaimsalleging non-infringement, unenforceability, invalidity, and misuse of theAvocent patents. A Markman hearing on claims construction was held inFebruary 2006, and a trial has been scheduled for July 2006.

 

On March 14, 2006,TFS Electronic Manufacturing Services, Inc. filed a Third-Party Complaint andan Objection to Claim of Avocent Corporation with the United States BankruptcyCourt, District of Arizona. As a result of the complaint, an adversary proceedinghas been commenced against Avocent in the TFS bankruptcy case in an effort todisallow Avocent’s claim in its entirety. TFS also seeks damages in anundetermined amount for Avocent’s alleged breach of contract, negligence,negligent misrepresentations, breaches of warranty, unjust enrichment,disparagement of TFS’ business, and quantum merit. TFS is seeking recovery ofactual damages, punitive damages, attorneys’ fees, pre- and post-judgmentinterest, costs, and the imposition of joint and several liability as toAvocent and a named co-defendant, TopSearch Printed Circuits (HK), Ltd. Avocenthas moved to dismiss all claims.

 

**Item 1A. Risk Factors.**

 

*THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKINGSTATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR ACTUALRESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS QUARTERLYREPORT.  THESE RISKS AND UNCERTAINTIESINCLUDING THE FOLLOWING:*

 

**Intense competition from new and existingcompetitors could impair our ability to grow our business and sell our productsand technologies.**

 

The markets for our products and technologies arehighly fragmented and intensely competitive. Aggressive competition from both hardware and software products andtechnologies could result in price reductions and loss of sales, which wouldmaterially harm our business.  Ourbusiness is becoming increasingly sensitive to the introduction of new productsand technologies, price changes, and marketing efforts by numerous and variedcompetitors.  Accordingly, our futuresuccess will be highly dependent upon our timely completion and introduction ofnew products and technologies and features at competitive prices andperformance levels that address the evolving needs of our customers.  We continue to experience aggressive pricecompetition and increased customer sensitivity to product prices, and pricingand margin pressures are likely to increase in the future.  Because of this competition, we may have tocontinue to lower the prices of many of our products and technologies to staycompetitive, while at the same time trying to maintain or improve our revenueand gross margin.  Because our businessmodel is based on providing innovative and high quality products, we may spenda proportionately greater amount on research and development than some of ourcompetitors.  If we cannot proportionatelydecrease our cost structure on a timely basis in response to competitive pricepressures, our gross margin and profitability could be adversely affected.  In addition, if our pricing and other factorsare not sufficiently competitive, or if there is an adverse reaction to ourproduct decisions, we may lose market share in certain areas, which couldadversely affect our revenue and prospects.

 

We compete for sales of switching systems andextension products with companies such as Raritan Computer, Rose Electronics,Minicom Advanced Systems, Agilent Technologies, Aten International, Belkin,Lantronix, and Digital V6.  We also facecompetition from software providers (such as Microsoft, Computer Associates,Tivoli, and BMC Software), who may be able to offer competitive softwareproducts at a much lower cost or even bundled for free, and from servermanufacturers (including our OEM customers), who are able to offer theircompetitive technologies or products at the time of the server sale.  These software and hardware products addressmany of the problems our switching systems and technologies, extensionproducts, and remote access products are designed to address.

 

Current and potential competitors may be able torespond more quickly to new or emerging technologies or products and to changesin customer requirements or to devote greater resources to the research,development, promotion, and sale of their products and technologies than wedo.  In addition, current and potentialcompetitors have established or may establish cooperative relationships amongthemselves or with third parties that enhance the ability of their products andtechnologies to address the needs of our current and prospectivecustomers.  We may not be able to competesuccessfully against current and future competitors and competitive pressuremay materially harm our business.

 

Certain of our customers, such as Dell,Hewlett-Packard, IBM, and Microsoft, presently offer competitive hardwareand/or software products and technologies that address many of the problems ourproducts and technologies address.  Thesecustomers could decide to manufacture their own switching or remote accessproducts, enhance their own internally-developed switching, IPMI, or otherembedded technologies, or offer products or technologies supplied by competitors.  Companies with hardware manufacturingexperience or network management products, many of which are substantiallylarger than we are and have significantly more financial resources than we do,also offer products or technologies that compete with us.  Established companies with hardwaremanufacturing or network management experience (such as Intel, Cisco, or EMC)could also offer new products, new technologies, or new solutions that competewith our products and technologies.

 

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**Our failure to respond to rapid technologicalchange or to introduce successful new products and technologies may result inreduced revenue or revenue growth.**

 

The process of developing or acquiring new productsand technologies and enhancing existing products and technologies is complex,costly, and uncertain, and any failure by us to anticipate customers’ changingneeds and emerging technological trends accurately could significantly harm ourmarket share and results of operations. We must make long-term investments, develop or obtain appropriateintellectual property, and commit significant resources before knowing whetherour predictions will accurately reflect customer demand for our products andservices.  After we develop a product, wemust then accurately forecast volumes and configurations that meet customerrequirements, manufacture appropriate volumes quickly and at low cost, andtrain our sales force and resellers.  Anydelay in the development, production, marketing of, or training for newproducts or technologies could result in our not being among the first tomarket, which could further harm our competitive position.

 

Sales of switching, extension, and remote accessproducts and technologies are characterized by rapid technological advances,frequent new product and technological introductions and enhancements, andsignificant price competition.  If we donot keep pace with these changes, we will lose customers, and our business willbe adversely affected.  The introductionof products or technologies incorporating superior alternatives such asswitching software, the emergence of new industry standards, or changes inpricing structure could render our existing products and technologies and thoseunder development obsolete or unmarketable. New technologies offered by us or our competitors could compete with ourexisting products at a lower price, which would reduce our revenue.

 

Our products combine components, such as printedcircuit boards, connectors, semiconductors, memory, cable assemblies, powersupplies and enclosures that are manufactured by other companies and aregenerally available to competitors and potential competitors.  Our future success will depend in large partupon continued innovative application of such commercially availablecomponents, together with continued enhancements to our proprietary software,firmware, and other technologies, the expansion and enhancement of existingproducts and technologies, and the development and introduction of new productsand technologies that address changing customer needs on a cost-effective andtimely basis.  If we fail to respond on atimely basis to technological developments, changes in industry standards,customer requirements, or software innovations, we will lose customers, and ourbusiness will be greatly harmed.  Similarresults could occur if we experience significant delays in the development orintroduction of new products or technologies.

 

Due to our significant reliance on OEM relationships,our development efforts may often be focused on developing new products,technologies, or enhancements for OEM customers.  As a result, our OEM relationships maynegatively affect our ability to develop new and enhanced products andtechnologies for our non-OEM customers. Moreover, these new products, technologies, or enhancements for OEMcustomers may not be available to, or readily marketable to, other customerswithout significant modification and delay. The termination or significant disruption of our relationship withcertain OEMs or other customers for whom we devote significant productdevelopment resources is likely to result in lost opportunities with respect tothe development of products, technologies, or enhancements for our othercustomers.

 

**We are likely to experience fluctuations inoperating results.**

 

We have in the past experienced substantialfluctuations in operating results, on a quarterly and an annual basis, and weexpect these fluctuations will continue in the future.  Our operating results will be affected by anumber of factors, including, but not limited to:

 

•                                          Thevolume and timing of orders, particularly from OEM and other large customers;

 

•                                          Thetiming of shipments;

 

•                                          Thetiming of new product introductions, new technologies, and enhancements by usand by our competitors;

 

•                                          Changesin product or distribution channel mixes;

 

•                                          Changesin pricing policies or price reductions;

 

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•                                          Competitionfrom new products and technologies and price reductions by competitors;

 

•                                          Theavailability and cost of supplies and components;

 

•                                          Salesand marketing expenses related to entering into new markets, introducing newproducts, new technologies, and retaining current OEM and other largecustomers; and

 

•                                          Fluctuationsin sales of servers due to changes in economic conditions or capital spendinglevels.

 

Our operating results will continue to be affected byseasonal trends, by general conditions in the server market, and by generaleconomic conditions.  We have experienced,and we expect to continue to experience, some degree of seasonality due tocustomer buying cycles.  We believe thatthe third and fourth quarters will generally have higher net sales levels dueto customer budgeting and procurement cycles, which may depress net sales inother quarters.  In addition, Europeansales are often weaker during the summer months.  Inthe past, revenue in our fourth quarter of each year has typically been higherthan revenue in prior quarters for the year, and we typically see a sequentialdecline in revenue from the fourth quarter of a year to the first quarter ofthe following year.  While it isdifficult to predict revenue in any quarter, we expect that this pattern willcontinue in the future.  Many ofthe factors that create and affect seasonal trends are beyond our control.

 

Our quarterly sales have also reflected a pattern inwhich a disproportionate percentage of each quarter’s total sales occur towardthe end of the quarter, and this trend has become more pronounced in recentperiods.  This uneven sales pattern makesprediction of revenue, earnings, and working capital for each financial perioddifficult, increases the risk of unanticipated variations in quarterly resultsand financial condition, and places pressure on our inventory management andlogistics systems.  If predicted demandis substantially greater than orders, there will be excess inventory.  Alternatively, if orders substantially exceedpredicted demand, we may not be able to fulfill all of the orders received inthe last few weeks of each quarter. Other developments late in a quarter, such as a systems failure,component pricing movements, or global logistics disruptions, could adverselyimpact inventory levels and results of operations in a manner that isdisproportionate to the number of days in the quarter affected.

 

We believe that quarter-to-quarter comparisons of ourhistorical financial results are not meaningful indicators of our futureoperating results, and you should not rely on them as an indication of ourfuture performance.  If our quarterlyoperating results fail to meet the expectations of equity research analysts,the price of our common stock could be negatively affected.

 

**Due to the international nature of our business,political or economic changes or other factors could harm our future revenue,increase our costs and expenses, and impair our financial condition.**

 

Sales outside the United States make up almost half ofour revenue, and over half of our manufacturing takes place outside the UnitedStates.  Accordingly, our future revenue,gross margin, expenses, and financial condition could suffer due to a varietyof international factors, including:

 

•                                          Ongoinginstability or changes in a country’s or region’s economic or political conditions,including inflation, recession, interest rate fluctuations, and actual oranticipated military or political conflicts;

 

•                                          Currencyfluctuations, which could contribute to variations in sales of products andtechnologies and could also affect our reported results expressed in U.S.dollars;

 

•                                          Longeraccounts receivable cycles and financial instability among customers;

 

•                                          Taxor trade regulations and procedures and actions affecting production, pricing,and marketing of or payments for products;

 

•                                          Locallabor conditions and other regulations;

 

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•                                          Differingtechnology standards or customer requirements;

 

•                                          Fluctuationsin freight costs and disruptions at important geographic points of exit andentry;

 

•                                          Naturalor manmade disasters, such as earthquakes, tsunamis, hurricanes, and typhoons,fires, power shortages, blackouts, or telecommunications failures; and

 

•                                          Medicalepidemics, such as “Bird Flu” or Severe Acute Respiratory Syndrome.

 

The factors described above also could disrupt ourproduct manufacturing and key suppliers located outside of the UnitedStates.  For example, we rely onmanufacturers in Asia and Europe for the assembly and manufacture of many ofour products.

 

**Our gross margins are expectedto vary and may decline.**

 

Gross margins may vary or decline fromperiod-to-period depending on a number of factors, including:

 

•                                          Theratio of OEM sales to branded sales, since OEM sales typically have lower grossmargins than branded sales;

 

•                                          Productmix, because sales of some of our products and technologies will have lowergross margins than sales of other products or technologies;

 

•                                          Rawmaterials, freight, and labor costs;

 

•                                          Introductionof new products and technologies by us and by our competitors; and

 

•                                          Thelevel of outsourcing of our manufacturing and assembly services.

 

We expect that our gross margins may vary and maydecline in the future primarily due to the factors listed above and toincreased competition and the introduction of new products and technologiesthat may affect product prices.

 

**A substantial portion of our businessconsists of sales to a limited number of OEM customers that are not obligatedto continue doing business with us, and these sales vary considerably fromquarter to quarter.**

 

A substantial portion of our sales is concentratedamong a limited number of OEM customers. Sales to these OEMs represented approximately 48% of net sales in 2005,45% of net sales in 2004, and 46% of net sales in 2003.  Sales to Hewlett-Packard representedapproximately 20% of our net sales in 2005, 23% of our net sales in 2004, and23% of our net sales in 2003.  Sales toDell represent approximately 15% of our net sales in 2005, 12% of our net salesin 2004, and 14% of our sales in 2003.

 

We have experienced, and we expect to continue toexperience, period-to-period variability in sales to these OEM customers.  Any cancellation, rescheduling, or reductionof orders by OEM customers in the future could materially adversely affect ouroperating results.  Although our OEMcustomers typically place orders for products up to several months prior toscheduled shipment dates, these orders are subject to cancellation.

 

Our OEM business is subject to many risks, including:

 

•                                          Contracttermination or reduced or delayed orders;

 

•                                          Shortorder cycles and difficulty in predicting sales because our OEM customers donot have long-term commitments to purchase from us;

 

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•                                          Changesin the OEMs’ internal product life cycles including the delay of planned newproduct introductions and uncertainty over product end-of-life decisions;

 

•                                          Adoptionof competing products or technologies developed by third parties for the OEMsor by the OEMs’ internal development teams; and

 

•                                          Changesin corporate ownership, financial condition, business direction, or product mixby the OEMs.

 

Any of these risks could have a material adverseeffect on our business, financial condition, and results of operations.  We have experienced, and expect to continueto experience, pricing pressures and significant variability in orders from ourOEM customers, which may in the future have a material adverse effect on ourquarterly sales and operating results.

 

The loss of one or more large OEM customers wouldmaterially harm our business.  While wehave contracts with some of our existing OEM customers, none of our OEMcustomers is obligated to purchase products from us except pursuant to bindingpurchase orders.  Consequently, any OEMcustomer could cease doing business with us at any time.  Our dependence upon a few OEMs alsoresults in a significant concentration of credit risk, thus a substantialportion of our trade receivables outstanding from time to time may beconcentrated among a limited number of customers.  In addition, OEM customers have longerpayment cycles that increase the likelihood of aged or problem accountsreceivable.

 

We use multiple warehouses for many of our OEMcustomers to fulfill their orders under a just-in-time inventory managementsystem, which requires us to maintain sufficient inventory levels of ourproducts at each of these warehouses to satisfy our OEMs anticipated customerdemand, and we generally recognize revenue only when these OEM customers takepossession of our products.  We arerequired to plan production, order components, and undertake our manufacturingactivities prior to the time that these orders become firm or the products areaccepted.  In addition, our OEM customershave requested, and are likely to continue to request from time to time, thatwe delay shipment dates or cancel orders for products that are subject to firmorders.  As a result, at any time we maybe holding a significant amount of OEM-branded products in inventory, and oursales to OEMs for future quarters are difficult to predict.  The inability to accurately predict thetiming and volume of orders for our OEM customers during any given quartercould adversely affect operating results for that quarter and, potentially, forfuture quarters.  If we underestimatesales, we may not be able to fill orders on a timely basis.  This could cause customer dissatisfaction andloss of future business.  If weoverestimate sales, we may experience increased costs from inventory storage,waste, and obsolescence.

 

**A substantial portion of our business consists ofsales of branded products, and these sales are difficult to forecast.  Failure to accurately forecast these salescould lead to costly overproduction or product shortages.**

 

A substantial portion of our sales consists of salesof branded products.  We expect thesesales to increase in the future, and if we are successful in increasing brandedsales as a percentage of net sales, our quarterly sales and operating resultswill become more dependent upon the volume and timing of branded product ordersreceived during the quarter.  Becausemany customers of our branded products typically place orders shortly beforetheir requested shipment date, revenues from branded sales are difficult toforecast.  With continued industry-wideinitiatives by distributors and resellers to reduce their inventories and toshorten their lead times, our major distributor and reseller customers arereducing early commitments to firm orders. Furthermore, many purchasers typically require prompt delivery ofproducts.  This results in a limitedbacklog of orders for these products and requires us to maintain sufficientinventory levels to satisfy anticipated customer demand.  The inability to accurately forecast thetiming and volume of orders for branded products during any given quarter couldadversely affect operating results for such quarter and, potentially, forfuture periods.  If we underestimatesales, we will not be able to fill orders on a timely basis.  This could cause customer dissatisfaction andloss of future business.  If weoverestimate sales, we will experience increased costs from inventory storage,waste, and obsolescence.

 

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**We will need to expandsales through distributors and resellers in order to develop our business andincrease revenue.**

 

We expect to rely increasingly on distributors andresellers, VARs, and systems integrators for the distribution and sale of ourbranded products.  Our strategycontemplates the expansion of our distributor and reseller network bothdomestically and internationally, particularly in Asia.  Our future success will depend in part on ourability to attract, train, and motivate new distributors and resellers andexpand our relationships with current distributors and resellers.  We may not be successful in expanding ourdistributor and reseller relationships. We will be required to invest significant additional resources in orderto expand these relationships, and the cost of this investment may exceed themargins generated from this investment.

 

In addition, distributors and resellers often haverights of return, and in the future, these returns from our existing or any newdistributors and resellers may have a material adverse effect on our business,financial condition, and results of operations. Our agreements with our current distributors and resellers are generallynonexclusive and may be terminated on short notice by either party without cause,and any new distributor or reseller agreements are likely to contain similarprovisions.  Distributors and resellersare not obligated to purchase products from us and frequently offer products ofseveral different manufacturers, including competitors’ products, anddistributors and resellers may give higher priority to the sale of ourcompetitors’ products.  A reduction insales efforts by our distributors or resellers could lead to a reduction in oursales and could materially adversely affect our business, financial condition,and results of operations.

 

**If we are unable to successfully develop ourinternational distribution networks and international sales efforts, results ofoperations may suffer.**

 

We are working to develop, integrate, and expand ourinternational distribution networks in an effort to increase internationalsales of switching, extension, remote access, and other products.  We may not be successful in developing orexpanding the international distribution network or in marketing and sellingproducts in foreign markets, particularly Asia. If the revenues generated by our international sales are not adequate torecover the expense of establishing, expanding, and maintaining aninternational distribution network, our business, financial condition, andresults of operations could be materially adversely affected.  If international sales become a moresignificant component of net sales, our business could become more vulnerableto the risks inherent in doing business on an international level, including:

 

•                                          Difficultiesin managing foreign resellers;

 

•                                          Longerpayment cycles and problems in collecting accounts receivable;

 

•                                          Theeffects of seasonal customer demand;

 

•                                          Changesin regulatory requirements;

 

•                                          Difficultiesin meeting the requirements of different international product regulations;

 

•                                          Risksrelating to the protection of our intellectual property rights;

 

•                                          Theimpact on our marketing expenses and our research and development resources aswe localize our product offerings to meet local user requirements such aslanguage translations and hardware compatibility issues;

 

•                                          Exportrestrictions, tariffs, and other trade barriers;

 

•                                          Fluctuationsin currency exchange rates; and

 

•                                          Potentiallyadverse tax consequences and political instability.

 

The existence or occurrence of any one of thesefactors could have a material adverse effect on our business, financialcondition, and results of operations.

 

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**We are dependent upon third-party suppliers andoutsourced manufacturing.  Disruption ofour access to these supplies and services, or problems with the quality ofsupplies or services, could prevent us from filling customer orders and harmour business.**

 

The principal components of our products areelectronic components, power supplies, semiconductors, memory, cableassemblies, line filters, enclosures, and printed circuit boards, all of whichare purchased from outside vendors.  Wegenerally buy components under purchase orders and generally do not havelong-term agreements with our suppliers. Also, we generally do not maintain large inventories of components.  Any termination of, or significant disruptionof, our relationships with the suppliers of our product components may preventus from filling customer orders in a timely manner which could result incustomer dissatisfaction and lost sales.

 

We have occasionally experienced, and we may in thefuture experience, shortages or delays in delivery of components.  Although alternate suppliers are availablefor most of the components and services needed to produce our products, thenumber of suppliers of some components is limited, and qualifying a replacementsupplier and receiving components from alternate suppliers could take severalmonths.

 

We have limited ability to control quality issues(particularly with respect to faulty components manufactured by thirdparities), and we depend upon suppliers to deliver components that are freefrom defects, competitive in functionality and cost, and in compliance withspecifications and delivery schedules. Disruption in supply, a significant increase in the cost of one or morecomponents, failure of a third party supplier to remain competitive infunctionality or price, or the failure of a supplier to comply with any of ourprocurement needs could delay or interrupt our ability to manufacture anddeliver our products to customers on a timely basis, thereby delaying ourrevenue recognition and adversely affecting our business, financial condition,and results of operations.

 

We rely on third party manufacturers for subassemblyof products and for final assembly, quality assurance, and testing of some ofour products.  These outsourcingarrangements and any future outsourcing arrangements involve numerous risks,including the economic and financial viability of these manufacturers, reducedcontrol over product quality, delivery schedules, manufacturing yields, andcosts.  Moreover, although arrangementswith such manufacturers may contain provisions for warranty obligations on thepart of such manufacturers, we are primarily responsible to our customers forwarranty obligations.

 

**Our products are subjectto warranty claims and returns. Increased warranty claims or returns could harm our business.**

 

We typically offer a 30-day unconditional money-backguarantee on our appliance products sold in North America.  We also offer warranties for parts andservice on all our products, ranging from one to three years (and, in the caseof some of our Equinox branded products, five years).  Although our historical return experience hasnot been significant, our returns may increase in the future.  An increase in returns would have an adverseeffect on our sales and could negatively affect our financial results.  We may, as a result of competitive pressuresor customer demands, change our warranty policies in the future to providecoverage that is greater in scope and duration than the coverage we currentlyoffer.  If we were to increase ourwarranty coverage, our risk of warranty claims, and therefore our warrantyexpense and reserves, would likely increase.

 

**We must meet the increased demands on customerservice operations or customer satisfaction and sales could suffer.**

 

Continued growth of our sales is likely to beaccompanied by increasing demands on customer service operations.  As a result of our commitment to a high levelof customer service, we will need to invest significant resources in themaintenance and improvement of our customer service resources.  Any failure to maintain adequate customerservice could cause customer dissatisfaction, result in reduced sales ofproducts and, accordingly, materially adversely affect our business, financialcondition, and

results of operations.

 

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**Executive officers and other key personnel maydepart, which could adversely affect our results of operations and harm ourability to grow the business.**

 

We are greatly dependent on the ability to retain keymanagement, sales, and technical personnel, and our future success is highlydependent upon the personal efforts of our management, sales, and technicalpersonnel.  The loss of services of keypersonnel could have a material adverse effect on our business, financialcondition, and results of operations.  Wehave historically used stock options as a key component in our executive andemployee compensation programs in order to align employees’ interests with theinterests of our stockholders, encourage employee retention, and providecompetitive compensation packages.  Manyof our employee stock options either have exercise prices in excess of ourstock price, which reduces the value of the stock options to employees, or arefully vested.  This could affect ourability to retain present employees.  Inaddition, the Financial Accounting Standards Board and other agencies havefinalized changes to U.S. generally accepted accounting principles that nowrequire us to record a charge to earnings for employee stock option grants andother equity incentives.  Moreover,applicable stock exchange listing standards relating to obtaining stockholderapproval of equity compensation plans could make it more difficult or expensivefor us to grant options to employees in the future.  As a result, we may incur increasedcompensation costs, change our equity compensation strategy or plans, or findit difficult to attract, retain, and motivate employees, any of which couldmaterially adversely affect our business. Competition for employees with the skills required, particularlyengineering and other technical personnel, is intense, and there can be noassurance that we will be able to attract and retain highly skilled employeesin sufficient numbers to sustain our current business or to support futuregrowth.  We may need to offer additionalcompensation or incentives to attract and retain these and other employees.

 

**Difficulties encountered during changing economicconditions could adversely affect our results of operations.**

 

For the last several years, we have experienced rapidrevenue and customer growth and expansion in the number of employees, productofferings, customers, operating locations, and suppliers.  In addition, we have acquired a number ofcompanies in the same time period.  Thisgrowth and these acquisitions have placed significant strain on our managerial,operational, and financial resources and resulted in new and increasedresponsibilities for management personnel. There can be no assurance that our management, personnel, systems,procedures, and controls are, or will be, adequate to support our existing andfuture operations or that we will continue to grow.

 

Our ability to effectively manage during changingeconomic conditions will require us to continue to implement and improve ouroperational, financial, and information systems and internal controls and willlikely require additional management personnel. In addition, we believe that we must continue to develop greaterengineering, marketing, sales, and customer service capabilities in order todevelop new products and technologies, secure new customers, and effectivelyserve the evolving needs of present and future customers.  We may not be successful in strengtheningthese capabilities.  Without adequatemanagement, engineering, product development, marketing, sales, and customerservice capabilities, our ability to effectively manage during changingeconomic conditions, expand and enhance our product lines, further penetrateexisting markets, and develop new markets will be significantly limited.  If we are unable to effectively manage duringchanging economic conditions, our business, financial condition, and results ofoperations could be materially adversely affected.

 

Because our business and operating results depend to asignificant extent on the general conditions in the server market, any adversechange in the server market due to adverse economic conditions, decliningcapital spending levels, or other factors could have a material adverse effecton our business, financial condition, and results of operations.  In addition, we continue to see industry-wideinitiatives by OEMs and by distributors and resellers to reduce theirinventories and to shorten their lead times, thereby reducing early commitmentsto firm orders by our major OEM and our distributor and reseller customers.

 

**We have limited protection of proprietary rightsand face risks of third party infringements.**

 

Our future success depends in part upon our ability toprotect proprietary rights in our products. We seek to protect our intellectual property rights by invoking thebenefits of the patent, trademark, copyright, trade secret, and unfaircompetition laws of the United States and other countries.  These laws,

 

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however, afford only limited protection.  There can be no assurance that the steps wehave taken to protect our intellectual property rights, or that the steps wetake in the future, will be adequate to prevent misappropriation of ourintellectual property or technologies or that our competitors will notindependently develop proprietary or other technologies that are substantiallyequivalent or superior to our products or technologies.

 

The U.S. Patent and Trademark Office has issuedseveral patents to us for various aspects of our products.  We have various corresponding patentapplications pending under the provisions of the Patent Cooperation Treaty,which permits the filing of corresponding foreign patent applications innumerous foreign countries within a limited time period.  We also have other United States and foreignpatent applications pending.  There canbe no assurance that any additional patents will be issued from any of thosepending applications or that any patents will be issued in any additionalcountries where our products can be sold. Claims allowed in our patents or in any pending patent applications maynot be of sufficient scope or strength for, or provide meaningful protection orany commercial advantage to us.  Also,competitors may develop their own intellectual property or technologies, obtaintheir own patents, or challenge the validity of, or be able to design around,our patents.  The laws of certain foreigncountries in which our products are or may be developed, manufactured, or sold(particularly certain countries in Asia) may not protect our products orintellectual property rights to the same extent as do the laws of the UnitedStates and thus increase the likelihood of piracy of our technologies andproducts.

 

In October 2003, we filed acomplaint for patent infringement in the United States District Court for theNorthern District of Alabama against ClearCube Technology, Inc.  The ClearCube complaint seeks injunctiverelief, damages, attorneys’ fees, and costs under three Avocent patents.  ClearCube has filed counterclaims allegingnon-infringement, unenforceability, invalidity, and misuse of the Avocentpatents.  A Markman hearing on claimsconstruction was held in February 2006, and a trial is scheduled for July 2006.

 

We may initiate claims or litigation against otherthird parties for infringement of proprietary rights or to establish thevalidity of proprietary rights. Similarly, our competitors may initiate claims or litigation against usalleging infringement of their proprietary rights or improper use of their intellectualproperty.  Existing litigation, and anyother litigation relating to intellectual property to which we become a party,is subject to numerous risks and uncertainties, including the risk ofcounterclaims or other litigation against us, and we may not be successful inany such litigation.  Litigation isexpensive, and the existing litigation or any other litigation by or against uscould result in significant additional expense and divert the efforts of technicaland management personnel, whether or not such litigation results in a favorabledetermination.  In the event of anadverse result in any such litigation, we could be required to pay substantialdamages, suspend or cease the manufacture, use, and sale of any infringingproducts, expend significant resources to redesign products or developnon-infringing technology, discontinue the use of certain processes, or obtainlicenses to the infringing technology. There can be no assurance that we would be successful in suchdevelopment or that such licenses would be available on reasonable terms, or atall, and any such development or license could require us to expend substantialtime and other resources.  In the eventthat any third party makes a successful claim against us, or our customers, anda license is not made available on commercially reasonable terms, our business,financial condition, and results of operations could be adversely affected.

 

The network server, electronics, and relatedindustries are characterized by vigorous pursuit and protection of intellectualproperty rights or positions, which has resulted in significant and oftenprotracted and expensive litigation.  Wehave in the past been, and we may from time to time in the future be, a partyin proceedings alleging infringement of intellectual property rights owned bythird parties.  If necessary ordesirable, we may seek licenses under such intellectual property rights.  However, licenses may not be offered on termsacceptable to us, or at all.  The failureto obtain a license from a third party for technology used by us could cause usto incur substantial liabilities and to suspend or cease the manufacture ofproducts requiring such technology. Additionally, current or future competitors could obtain patents thatmay prevent us from developing or selling our products.

 

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**We have acquired, and expect to continue toacquire, technologies and companies that could disrupt our business or exposeus to other risks.**

 

A key component of our engineering and productdevelopment strategy is the acquisition of technologies and companies.  We recently announced that we have signed adefinitive agreement to acquire LANDesk Group Limited, and that transaction isexpected to close in the third quarter of 2006. We acquired Equinox Systems Inc. in 2001, 2C Computing, Inc. in2002, Soronti, Inc. in 2003, and Crystal Link Technologies, OSA Technologies,Inc., Sonic Mobility, Inc. in 2004, and Cyclades Corporation in 2006.  We intend to continue to execute our strategythrough the acquisition of technologies or companies or through investments incomplementary companies, products, or technologies, and it is likely we willcomplete such acquisitions or investments in the future.  These acquisitions and investments involvemany risks, including the following:

 

•                                          Difficultyintegrating the acquired company’s personnel, products, technologies, andoperations;

 

•                                          Diversionof management’s attention;

 

•                                          Difficultyin combining product and technology offerings and entering into new markets (such as software) or geographical areas in which we have no or limited directexperience and where our competitors may have stronger market positions;

 

•                                          Lossof key personnel;

 

•                                          Delaysor difficulties in coordinating and combining administrative, manufacturing,research and development and other operations, facilities, and relationshipswith third parties in accordance with local laws and other obligations whilemaintaining adequate standards, controls and procedures;

 

•                                          Difficultyin completing projects associated with acquired in-process research anddevelopment;

 

•                                          Incurringamortization expense related to certain intangible assets and recordinggoodwill and non-amortizable assets that will be subject to impairment testingand possible impairment charges;

 

•                                          Dilutionof existing stockholders as a result of issuing equity securities, includingthe assumption of any stock options issued by the acquired company;

 

•                                          Overpaymentfor any acquisition or investment;

 

•                                          Assumptionof liabilities of the acquired company, including any potential intellectualproperty infringement claims; and

 

•                                          Incurringsubstantial write-offs, restructuring charges, and transactional expenses.

 

Ourfailure to manage these risks and challenges could materially harm ourbusiness, financial condition, and results of operations.  Further, if we do not successfully addressthese challenges in a timely manner, we may not fully realize all of theanticipated benefits or synergies on which the value of a transaction wasbased.  Future transactions could causeour financial results to differ from expectations of market analysts orinvestors for any given quarter.

 

**Our reorganization intofive separate business divisions or units could disrupt our business or affectour profitability.**

 

Our reorganization intofive new business divisions became effective in the first quarter of 2006.  The creation of these five business units wasdesigned to streamline our operations and put vital decisions closer to ourcustomers, but the allocation of our previously existing business among thefive divisions could confuse and distract our customers, suppliers, andemployees.  In addition, thereorganization could adversely affect or delay our development andintroduction of new products and technologies, result in the loss ofmanagement, technical, or other key personnel, disrupt our supplier or customerrelationships,

 

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jeopardize our supplier or sales channels and our branding andmarketing efforts, and increase our administrative expense, all of which couldaffect our profitability.

 

**Unanticipated changesin our tax rates or exposure to additional income tax liabilities could affectour profitability.**

 

We are subject to income taxes in both the UnitedStates and various foreign jurisdictions, and our domestic and internationaltax liabilities are subject to the allocation of expenses in differentjurisdictions.  Our effective tax ratescould be adversely affected by changes in the mix of earnings in countries withdiffering statutory tax rates, in the valuation of deferred tax assets andliabilities, in tax laws, or by material audit assessments, which could affectour profitability.  In addition, theamount of income taxes we pay is subject to audit in various jurisdictions, anda material assessment by a governing tax authority could affect ourprofitability.

 

**Fluctuations in the value of foreign currenciescould result in currency exchange losses.**

 

Currently, a majority of our international business isconducted in U.S. dollars.  However, aswe expand our international operations, it is likely that internationalbusiness will increasingly be conducted in foreign currencies.  In particular, the introduction of the eurohas led many of our European customers to request or insist that our sales tothem be denominated in euros instead of U.S. dollars.  Fluctuations in the value of foreigncurrencies relative to the U.S. dollar have caused, and are expected toincreasingly cause, currency translation gains and losses.  While we attempt to hedge our foreigncurrency exposure, we cannot predict the effect of exchange rate fluctuationsupon future quarterly and annual operating results, and we may experiencecurrency losses in the future.

 

**Unforeseenenvironmental costs could negatively affect our future earnings.**

 

Some of our operations use substances regulated undervarious federal, state, and international laws governing the environment,including those governing the discharge of pollutants into the air and water,the management and disposal of hazardous substances and wastes, and the cleanupof contaminated sites.  Many of ourproducts are subject to various federal, state, and international laws governingchemical substances in products, including those regulating the manufacture anddistribution of chemical substances and those restricting the presence ofcertain substances in electronics products. We could incur substantial costs, including cleanup costs, fines, civilor criminal sanctions, third-party property damage, or personal injury claimsif we were to violate or become liable under environmental laws or if ourproducts become non-compliant with environmental laws.  We also face increasing complexity in ourproduct design and procurement operations as we adjust to new and futurerequirements relating to the materials composition of our products, includingthe restrictions on lead and certain other substances that will apply tospecified electronics products put on the market in the European Union as ofJuly 1, 2006 (Restriction of Hazardous Substances Directive) and similarlegislation currently proposed in China and other countries.  The ultimate costs under environmental lawsand the timing of these costs are difficult to predict, and liability undersome environmental laws relating to contaminated sites can be imposedretroactively and on a joint and several basis.

 

We could also face significant costs and liabilitiesin connection with product take-back legislation.  The European Union has finalized the WasteElectrical and Electronic Equipment Directive, which makes producers ofelectrical goods, including computers and peripherals, financially responsiblefor specified collection, recycling, treatment, and disposal of past and futurecovered products.  This deadline to enactand implement the directive by individual European Union governments generallywas August 13, 2004, although extensions were granted to some countries(such legislation, together with the directive, the “WEEE Legislation”), andproducers are financially responsible under the WEEE Legislation beginning inAugust 2005.  Similar legislationhas been or may be enacted in other geographies, including in the United Statesand Japan, the cumulative impact of which could be significant for us.  We will incur some costs under the WEEElegislation but the amount and timing of these costs are difficult topredict.

 

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**Provisions in our charter documents and inDelaware law may discourage potential acquisition bids for us and may preventchanges in management that stockholders may favor.**

 

Provisions in our charter documents could discouragepotential acquisition proposals and could delay or prevent a change in controltransaction that stockholders may favor. These provisions could have the effect of discouraging others frommaking tender offers for shares, and as a result, these provisions may preventthe market price of our common stock from reflecting the effects of actual orrumored takeover attempts and may prevent stockholders from reselling theirshares at or above the price at which they purchased their shares.  These provisions may also prevent changes inmanagement that stockholders may favor. Our charter documents do not permit stockholders to act by writtenconsent, limit the ability of stockholders to call a stockholders meeting, andprovide for a classified board of directors, which means stockholders can onlyelect, or remove, a limited number of directors in any given year.  Furthermore, the board of directors has theauthority to issue up to five million shares of preferred stock in one or moreseries.  The board of directors can fixthe price, rights, preferences, privileges, and restrictions of such preferredstock without any further vote or action by our stockholders.  The issuance of shares of preferred stock maydelay or prevent a change in control transaction without further action by ourstockholders.

 

In addition, Delaware law may inhibit potential acquisitionbids for us.  Delaware law preventscertain Delaware corporations, including Avocent, from engaging, under certaincircumstances, in a business combination with any interested stockholder forthree years following the date that such stockholder became an interestedstockholder.

 

**Item 2.****    Unregistered Sales of Equity Securities and Use ofProceeds.**

 

In the fourth quarter of 2004 our Board of Directorsapproved a stock repurchase program whereby we may, from time to time, purchaseup to 2 million shares of our common stock in the open market, in privatelynegotiated transactions or otherwise, at prices that we deem appropriate. OnApril 29, 2005, our Board added 2 million shares to this program and now atotal of 4 million shares are authorized to be repurchased. The plan has noexpiration date. Details of purchases made during the quarter ended March 31,2006 are as follows:

 
| **Period:**                               | ** ** | **Total Number of  Shares Purchased  During the Period** | ** ** | **Average Price Paid  Per Share for Period  Presented** | ** ** | **Total Cumulative   Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **Maximum  Number of  Shares  Remaining to  Purchase Under  the  Plan** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                      |       |                                                     |       |                                                    |       |                                                                                    |       |                                                                    |       |
| January 1, 2006 — January 31, 2006   |       | 50,000                                                   |       | $                                                       | 29.35      |                                                                                    | 2,825,000  |                                                                    | 1,175,000  |   |
| February 1, 2006 — February 28, 2006 |       | 250,000                                                  |       | $                                                       | 33.59      |                                                                                    | 3,075,000  |                                                                    | 925,000    |   |
| March 1, 2006 — March 31, 2006       |       | 525,000                                                  |       | $                                                       | 32.55      |                                                                                    | 3,600,000  |                                                                    | 400,000    |   |
| Quarter ended March 31, 2006              |       | 825,000                                                  |       | $                                                       | 32.67      |                                                                                    |       |                                                                    |       |   |

 

**Item 6.****    Exhibits.**

 

(a) Exhibits

 
| **31.1**   | **Sarbanes-Oxley Act of 2002  Section 302(a) Certification of the Chief Executive Officer**                                                                                              |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                               |
| **31.2**   | **Sarbanes-Oxley Act of 2002  Section 302(a) Certification of the**Chief Financial Officer                                                                                               |
| ** ** | ** **                                                                                                                                                                               |
| 32.1       | Certification of the Chief  Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|       |                                                                                                                                                                                     |
| 99.14      | Transaction Agreement  dated April 26, 2006, by and among Avocent Corporation, Crimson Acquisition  Corp., LANDesk Group Limited, and the Shareholder Representative.                    |
|       |                                                                                                                                                                                     |
| 99.15      | Summary of Avocent  Corporation 2006 Executive Bonus Program.                                                                                                                            |

 

ITEMS 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

 

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### **SIGNATURE**

### ** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |   | AVOCENT CORPORATION                                             |                       |
|--------|--------|-----------------------------------------------------------------|----------------------------|
|   |   | (Registrant)                                                    |
|   |   |                                                            |
|   |   |                                                            |
|   | Date:  | May  10, 2006                                                   | /s/ Edward H.  Blankenship |   |
|   |   | Edward H. Blankenship                                           |
|   |   | Senior Vice President of Finance, Chief Financial               |
|   |   | Officer, and Assistant Secretary (Principal  Financial Officer) |
|        |        |                                                                 |                            |  |

 

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